Climate bond
Encyclopedia
Climate bonds are fixed-income financial instruments (bonds
) linked in some way to climate change solutions.
Climate Bonds are issued in order to raise finance for climate change solutions - climate change mitigation or adaptation related projects or programs. These might be greenhouse gas emission reduction projects ranging from clean energy to energy efficiency
, or climate change adaptation projects ranging from building Nile
delta flood defences or helping the Great Barrier Reef
adapt to warming waters.
Like normal bonds
, Climate Bonds can be issued by governments, multi-national banks or corporations. The issuing entity guarantees to repay the bond
over a certain period of time, plus either a fixed or variable rate of return.
Most Climate Bonds are asset-backed
, or ringfenced, with investors being promised that all funds raised will only go to specified climate-related programs or assets, such as renewable energy plants or climate mitigation focused funding programs.
In their UNEP paper on investors and climate change, Mackenzie and Ascui differentiate a climate bond from a green bond:
“(A climate bond is) an extension of the green bond concept. Green bonds are issued ... in order to raise the finance for an environmental project. Climate bonds (are) issued ... to raise finance for investments in emission reduction or climate change adaptation.”
The London-based Climate Bond Standards Board provides a certification program for Climate Bonds.
Climate Bonds are theme bonds, similar in principle to a railway bond of the 19th century, the war bonds of the early 20th century or the highway bond of the 1960s. Theme bonds are designed to:
Otherwise, for operational purposes, theme bonds largely function as conventional debt instruments. They are risk-weighted
and credit rated
in the usual way based on the creditworthiness of the issuer, and tradable, market conditions permitting, in international secondary bond markets
. These instruments can theoretically be issued at all levels of the fixed income market
, from sovereigns to corporate.
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
) linked in some way to climate change solutions.
Climate Bonds are issued in order to raise finance for climate change solutions - climate change mitigation or adaptation related projects or programs. These might be greenhouse gas emission reduction projects ranging from clean energy to energy efficiency
Energy efficiency
Energy efficiency may refer to:*Efficient energy use, sometimes simply called energy efficiency.*Energy conversion efficiency, the ratio between the output and input of an energy conversion machine....
, or climate change adaptation projects ranging from building Nile
Nile
The Nile is a major north-flowing river in North Africa, generally regarded as the longest river in the world. It is long. It runs through the ten countries of Sudan, South Sudan, Burundi, Rwanda, Democratic Republic of the Congo, Tanzania, Kenya, Ethiopia, Uganda and Egypt.The Nile has two major...
delta flood defences or helping the Great Barrier Reef
Great Barrier Reef
The Great Barrier Reef is the world'slargest reef system composed of over 2,900 individual reefs and 900 islands stretching for over 2,600 kilometres over an area of approximately...
adapt to warming waters.
Like normal bonds
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
, Climate Bonds can be issued by governments, multi-national banks or corporations. The issuing entity guarantees to repay the bond
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
over a certain period of time, plus either a fixed or variable rate of return.
Most Climate Bonds are asset-backed
Asset-backed security
An asset-backed security is a security whose value and income payments are derived from and collateralized by a specified pool of underlying assets. The pool of assets is typically a group of small and illiquid assets that are unable to be sold individually...
, or ringfenced, with investors being promised that all funds raised will only go to specified climate-related programs or assets, such as renewable energy plants or climate mitigation focused funding programs.
In their UNEP paper on investors and climate change, Mackenzie and Ascui differentiate a climate bond from a green bond:
“(A climate bond is) an extension of the green bond concept. Green bonds are issued ... in order to raise the finance for an environmental project. Climate bonds (are) issued ... to raise finance for investments in emission reduction or climate change adaptation.”
The London-based Climate Bond Standards Board provides a certification program for Climate Bonds.
Climate Bonds are theme bonds, similar in principle to a railway bond of the 19th century, the war bonds of the early 20th century or the highway bond of the 1960s. Theme bonds are designed to:
- Allow institutional capitalInstitutional investorInstitutional investors are organizations which pool large sums of money and invest those sums in securities, real property and other investment assets...
- pension, government, insurance and sovereign wealth fundSovereign wealth fundA sovereign wealth fund is a state-owned investment fund composed of financial assets such as stocks, bonds, property, precious metals or other financial instruments. Sovereign wealth funds invest globally. Some of them have grabbed attention making bad investments in several Wall Street financial...
s - to invest in areas seen as politically important to their stakeholders that have the same credit risk and returns profile as standards bondsBond (finance)In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
. - Provide a means for governments to direct funding to climate change mitigation. For example, this might be done by choosing to privilege qualifying bonds with preferential tax treatments.
- Send a political signal to other stakeholders.
Otherwise, for operational purposes, theme bonds largely function as conventional debt instruments. They are risk-weighted
Risk-weighted asset
Risk-weighted asset is a bank's assets or off-balance sheet exposures, weighted according to risk. This sort of asset calculation is used in determining the capital requirement or Capital Adequacy Ratio for a financial institution...
and credit rated
Credit rating
A credit rating evaluates the credit worthiness of an issuer of specific types of debt, specifically, debt issued by a business enterprise such as a corporation or a government. It is an evaluation made by a credit rating agency of the debt issuers likelihood of default. Credit ratings are...
in the usual way based on the creditworthiness of the issuer, and tradable, market conditions permitting, in international secondary bond markets
Bond market
The bond market is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the Secondary market, usually in the form of bonds. The primary goal of the bond market is to provide a mechanism for long term funding of public and...
. These instruments can theoretically be issued at all levels of the fixed income market
Bond market
The bond market is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the Secondary market, usually in the form of bonds. The primary goal of the bond market is to provide a mechanism for long term funding of public and...
, from sovereigns to corporate.