Over the past two years, The Climate Bonds Initiative has been creating a new class of bonds that can finance a rapid transition globally to a 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.
"Putting the emphasis on private financing allows a different perspective. In place of always talking about the ‘costs' of climate change, we can talk instead about investment opportunities," notes Nick Robins, HSBC Climate Change Centre of Excellence. "The transition to a low-carbon economy presents capital with what is likely to become the largest commercial opportunity of our time: investing in clean energy and low carbon infrastructure," he adds.
Most of the bonds will be bought by institutional investors, but there are plans to make them available to retail investors too.
The Climate Bonds Initiative, which was initiated by the International Network for Sustainable Financial Markets, an international think tank, now operates as part of the investor-led Carbon Disclosure Project.
According to the International Energy Agency, about a trillion dollars a year through 2050 must be pumped into low-carbon industries to avert catastrophic climate change and to fund adaptation. A large portion of that money will have to come from bond markets.
That may sound like a lot of money, but the mainstream bond market is quite large: more than $6 trillion in new bonds were issued in 2010 alone and funds under management reached $105 trillion.
Just 1% of those assets need to be redirected toward building a low carbon economy. In the past two years, the nascent green/climate bond market grew from $1 billion to $5 billion outstanding, with about $12 billion issued.
Growing this "green debt" market will provide institutional investors with opportunities to switch from carbon intensive to low-carbon investments both to mitigate climate change (renewable energy installations, new technologies that reduce greenhouse gas emissions, reforestation) and adapt to its consequences (watershed management, flood protection, disaster risk reduction).
New Carbon Bond Standard Released
How can investors and governments judge which bonds will help the most to mitigate climate change or help people adapt? Which ones should they prioritize?
It's important to guide investors to the most vital investments - those bonds that make the most difference - and that's what the prototype Climate Bond Standard does.
Released in late November, the Standard certifies Climate Bonds using strict criteria, starting with bonds that are currently on the market. It begins with eligible wind projects, and will expand to solar and other renewable energy projects over the coming months.
The Standard assures that funds raised using a Climate Bond are used in ways consistent with delivering a low-carbon economy, and can include projects or assets that directly contribute to:
- developing low-carbon industries, technologies and practices that achieve the level of resource efficiency necessary to avoid global temperature rise over 2 degrees Centigrade
- essential adaptation to the consequences of climate change.
For the next six months, certification will proceed using a prototype Standard, while changes are incorporated based on feedback. After that, the Standard will be final. To apply for certification, bond issuers will pay one-tenth of a basis point of the bond's value, and will also pay a licensed third party to verify the bond complies with the Standard.
"The transition to a low-carbon economy requires a wide range of energy and infrastructure investments," says Jack Ehnes, CalSTRS CEO. "We are concerned that the investments being made are the right ones. Climate Bonds Standards will provide a simple tool for investors to screen the opportunities that come before them."