In a first for a local authority, Ile-de-France regional council's recent 12 year, 3.625%, environmentally and socially responsible bond was 175% over-subscribed in just a half hour, raising the ask of €350 million to almost double that for clean energy, retrofitting schools and low-energy social housing, and biodiversity.
The Climate Bonds Initiative is proposing the creation of Renewable Energy Covered Bonds to leverage private-sector investment into the low-carbon economy.
"Bonds have allowed us to finance the building of Europe's sewer systems, the growth of America's highway system, and the financing of two World Wars. We can now use Climate Bonds to finance the quick, global transition required to head off runaway climate change," explains James Cameron, Vice Chair of Climate Change Capital.
The €2.5 trillion covered bonds market offers a unique dual recourse structure that offers investors a high degree of security, they say.
"The current financial crisis has forced banks to cut back on lending as a result of severe losses of capital and the forthcoming Basel III regulation represents a further restraint on bank lending", says Sean Kidney, Chair of the Climate Bonds Initiative and co-author of the proposal. "Governments, on the other hand, which have been the main supporters of clean energy are unlikely to increase investment given tightened fiscal conditions."
Renewable Energy Covered Bonds (RECBs) would extend the range of investment grade financial instruments available to investors.
And public sector guaranteed RECBs would enable buy-side analysts to gain experience of the financial performance of renewable energy assets without direct exposure to underlying credit risks.
"Covered bonds"have proven to be a reliable source of term-dated funds for banks to on-lend in specific sectors targeted by policy makers, such as housing, says Frank Damerow of LBBW Bank, another co-author of the proposal. Legislation governing the issue of covered bonds has been introduced in almost 40 countries.
"Covered bonds are highly regulated and enjoy superior ratings and lower funding costs. Banks would benefit from issuing ‘Renewable Energy Covered Bonds' as it would give them access to a wider pool of term-dated funds with which they could increase their lending activities."
"Renewable energy projects don't have the long-term financial track records that bond investors need. However, covered bonds have a unique feature: the cover pool of assets is visible and open to analysis," says Stuart Clenaghan, Principal of Eco System Services and the third co-author. "Disclosure standards are increasingly defined by law, and issuers frequently provide additional information above the minimum requirements. Once specific reporting standards are established, investors could improve their understanding of how renewable energy assets perform, without having to take a direct credit exposure."
"The transition to a low-carbon economy is possible by mobilizing private and institutional investments. The world's largest pool of capital - $95 trillion bond market - has largely been untapped for renewable energy finance," says Sean Kidney. "Existing covered bonds legislation that investors are familiar with can easily be adapted to accommodate loans for renewable energy. Renewable Energy Covered Bonds would be made up of ring-fenced, highly regulated and secure assets."
The International Agency Authority (IEA) calculates that an additional $1 trillion global investment each year is required to reduce greenhouse gas emissions to safe levels.
"Investments in renewable energy projects are necessary before a climate tipping-point is reached. Achieving the scale of investment required is not an easy task especially given the urgency required. However, while climate covered bonds legislation is being developed, a renewable energy covered bond market could be kick-started with the use of guarantees by agencies such as the European Investment Bank," says Sean Kidney.
Read about the Climate Bonds Initiative here and in our feature story here.
Read the proposal: