Climate Bonds to Fund Clean Energy Development, While Providing Fixed Income

In 2009, an international think tank decided the global bond market could play a central role in financing clean energy projects, while providing attractive fixed income returns to investors. 

The International Network for Sustainable Financial Markets launched the Climate Bonds Initiative to foster the use of long-term debt to finance a rapid, global transition to a low-carbon economy.

"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.

"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 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.

The Climate Bonds Initiative operates as an autonomous project supported the Carbon Disclosure Project.

Large pension funds such as the California State Teachers’ Retirement System, investor groups such as the Ceres Investor Network on Climate Risk,  governments like the California State Treasurers’ Office, and nonprofits such as the Natural Resources Defense Council worked together to create a Climate Bond Standard which will be suitable for the broadest possible range of investors and projects, while still giving investors assurance that the underlying projects are indeed helping to mitigate climate change.

Most of the bonds will be bought by institutional investors, but there are plans to make them available to retail investors too.

In late July, the California State Teachers’ Retirement System (CalSTRS), the largest teacher pension fund in the US with $154.3 billion under management, announced it would join the Climate Bond Standards Board.

The Standards Board is developing a program that provides  investors and governments to easily assess the integrity of environmental claims for green bonds.

"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."

"We are looking for investment grade returns that also address climate change," says Michelle Cunningham, CalSTRS director of fixed income. "We challenge industry and government to now provide the investment opportunities we need to both deliver secure pensions for our members and address the long-term systemic threat of climate change to investment values."

Sean Kidney, chairman of the Climate Bonds Initiative, which is leading the standards program, says, "According to the International Energy Authority we need up to a trillion dollars a year to be flowing into low-carbon industries if we’re to avert catastrophic climate change. A large part of that money will have to come from bond markets.

"We need to ensure it’s invested properly to support a transition to a low carbon economy. Standards will provide an international tool for investors and governments to assess the integrity of green investments and to give them preference. It will support liquidity with green portfolios, essential for investors today."

Some $12 billion of bonds backed by investments related to climate change solutions have already been issued internationally.

Funds under management by global bond traders reached $105 trillion in 2010. Last year, more than $6 trillion of new bonds were issued.  "The challenge of redirecting just 1 percent per year of funds under management into building the low carbon economy is therefore eminently achievable," says Kidney. 

Other members of the Standards Board include California State Treasurer Bill Lockyer, the Australian Investor Group on Climate Change, the Carbon Disclosure Project and the Natural Resources Defense Council. 

A Climate Bonds certification will be issued to bonds that are backed by assets meeting the Standard. Qualifying assets will include wind farms, solar energy plants and a wide variety of assets required for a low-carbon economy. Licensed third party verifiers will review proposed bonds to confirm they comply with the Standard. According to Kidney, the first Standard will be released within weeks. 

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