Most of us would understand why there is a need to move towards a low carbon economy and why huge financial investments are required. The challenge before us is the short-time frame in which investments need to be mobilized in a systematic manner.
But where’s the money on the table? From where will it come from? Would governments be able to finance? What are the sources of funds? What role can private sector play?
We need investment tools that act as a catalyst in this transformation process.
Climate Bonds are one such tool, assures Sean Kidney, Chair, Climate Bonds Initiative.
In an interview with ThinktoSustain.com, Kidney explains how climate bonds can bridge this carbon capital divide and push private investors towards putting their money in clean technologies. He also provides insights about the International Standards and Certification Scheme for climate bonds currently being developed by Climate Bonds Initiative.
ThinktoSustain.com: There is a serious concern over the urgency with which climate change mitigation efforts need to be initiated. At the same time, huge investments are needed to propel clean technology and many other mitigation projects. How do you see current ongoing efforts to mobilize financial resources?
Sean Kidney: On urgency, you are absolutely right. To avoid catastrophic climate change, the International Energy Agency (IEA) estimates we need to invest some $ 11.6 trillion globally by 2020, above business-as-usual energy investments – and “Business-as-Usual” estimates are already unusually high because of the vast build-up of generation capacity required in India, China and other countries.
On the other hand, the energy infrastructure we need to build will be valuable – it will generate revenue over a long period. The investments will pay their way; and in developing nations, it will change the lives of billions.
So the challenge is to direct investment into clean energy – quickly – and away from greenhouse gas producing energy generation. Of course, that will also hasten economies of scale and lower unit costs for clean energy, further improving the economics of future projects.
ThinktoSustain.com: Can you explain briefly what climate bonds are and how they can hasten investment opportunities for a low-carbon world?
Sean Kidney: Climate Bonds are themed asset-backed or ring-fenced bonds issued to raise finance for climate change mitigation- or adaptation-related projects or programs.
Themed bonds are a means of making a claim about policy or values benefits of the underlying assets. They don’t necessarily infer differences in risks or rewards – ratings agencies still look at the credit worthiness of the issuer and/or the underlying assets.
Thematic labeling provides a means for investors interested in the theme area to focus investing on that area. For example, most large pension funds are acutely aware of the ‘macro’ risks of climate change, but are lacking data to use in their portfolio management. However, if they’re presented with a choice between ‘green’ and ‘brown’ investments with the same risk/reward profile, they will choose green because of their understanding of the need to address those macro risks.
Of course, investors need an easy way to differentiate credible green from brown – that’s the reason we are developing an International Standards and Certification Scheme for Climate Bonds. Those standards not only make it easier for investors to preference green product, but also provide a tool for governments to preference debt in a specific policy area through regulatory mechanisms, tax policies and risk-sharing.
For example, the U.S. Government provides tax credits for Clean Renewable Energy Bonds and formerly provided guarantees for municipal Property Assessed Clean Energy Bonds. An internationally consistent scheme will, in particular, make it easier for developing countries to preference in a fashion that supports international liquidity of climate bonds – their climate bonds will be able to be compared with another country’s climate bonds, allowing fund managers to more easily hold cross-border portfolios.
ThinktoSustain.com: What are the mechanisms needed for introducing, marketing and effective implementation of climate bonds?
Sean Kidney: From a market design perspective (what we’re doing):
- International standards for the labeling of climate bonds (consistent eligibility criteria)
- Widely available listings of climate bonds (we are talking with index providers about this)
- Online market, matching issuers with prospective buyers
To make the thematic class succeed, we need volume of issuance. Alerting potential issuers of the marketing benefits of thematic bond issuance is a key part of the work of the Climate Bonds Initiative.
From an Issuer perspective:
- Ensure assets that back the bond are compliant with published eligibility criteria for asset and collateral types. (Climate bonds are asset-backed or linked). A Climate Bond-funded project would be required to secure a Certificate of Compliance as a “low-carbon” project for that particular project-type. That means it complies with agreed standards. Some projects, such as biomass energy generation plants, might require annual certificates of compliance (e.g., evaluating feedstocks utilized).
- Commission a licensed verifier (e.g., KPMG) to review for certification. These firms will verify that the project corresponds with the criteria set out in the published standard before reporting back to the Standards Board to recommend certification or not.
- Let the Climate Bonds Initiative know as early as possible so we can let potential buyers know.
