Climate bond

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Climate bonds (also known as green bonds) are fixed-income financial instruments (bonds) linked in some way to climate change solutions.

Climate bonds are a relatively new asset class, but they are growing rapidly.[1] The total volume of climate bonds was estimated at 160 billions of dollars on 2016; of which 70 billions were issued in 2016.[1]


Voters in the City of San Francisco approved a revenue bond authority in 2001, in the form of a city charter amendment (Section 9.107.8) known as the "solar bonds," to finance renewable energy and energy conservation measures on homes, businesses and government buildings.[2] The campaign for solar bonds, Proposition H, was motivated by the need for the city to take meaningful action on climate change.[3] The solar bond authority was being used as part of the city's renewable energy program, administered by the San Francisco Public Utilities Commission, CleanPowerSF.[4]

European Investment Bank (EIB) issued an equity index-linked bond in 2007, which became the first fixed income product among socially responsible investments.[5] This “Climate Awareness Bond” structure was used to fund renewable energy and energy efficiency projects. Afterwards, The World Bank became first in the world to issue a labelled “green bond” in 2008, which followed a conventional “plain vanilla” bond structure, contrary to EIB’s equity-linked Climate Awareness Bond.[6]

The green bond market has subsequently increased rapidly in issuance. From 2015 to 2016, the Climate Bonds Initiative reports that there was a 92% increase in green bonds issuance to $92 billion,[7] with different types of issuers starting to issue green bonds. Apple, for example, became the first tech company to issue a green bond in 2016, and Poland became the first sovereign country to issue a green bond at the end of 2016.[8]


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.[9]

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.[10]

In their UNEP paper on investors and climate change, Mackenzie and Ascui[11] 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,[12] 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 capital - pension, government, insurance and sovereign wealth funds - to invest in areas seen as politically important to their stakeholders that have the same credit risk and returns profile as standards bonds.
  • 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 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.

Benefits of green bonds[edit]

The growth of bond markets provides increasing opportunities to finance the implementation of the Sustainable Development Goals, Nationally Determined Contributions and other green growth projects. Green bonds are becoming an increasingly prevalent form of green finance, particularly for clean and sustainable infrastructure development and their large funding needs. They offer a vehicle to both access finance from the capital markets and deliver green impacts that can be verified against standards. In developing countries, green bonds are already financing critical projects, including renewable energy, urban mass transit systems and water distribution.[13]

Green bonds mobilised over $93 billion in 2016 to projects and assets with positive environmental impacts. At the current growth rate, they could mobilise over $200 billion in 2017.[14]

Of total global bond issuance, however, this is still around just 1%.[13]

According to a report by the Climate and Development Knowledge Network (CDKN) and PricewaterhouseCoopers, a green bond market has three key benefits to a country and its environmental goals and commitments.

  • It increases the finance available for green projects, therefore incentivising an increase in their number. Today, green bonds mainly finance projects within renewable energy, energy efficiency, low-carbon transport, sustainable water, and waste and pollution.
  • It is a viable vehicle for enabling the increasing pool of sustainable investors to access environmental projects. Bonds are an instrument and an approach with which foreign investors are familiar, so these institutions need little new understanding or capacity. Investors are also interested in placing money where the environmental impact achieved is highest per unit of currency, and emerging and developing economies have the potential to offer this where lower project costs exist.
  • It can be a catalyst for further development of the domestic capital market and financial system more broadly beyond environmentally related projects.[13]

Demand for green bonds[edit]

The Business and Sustainable Development Commission describes at least US$12 trillion in market opportunities for business from sustainable business models.[15]

The United Nations estimates an annual funding gap of $2.5 trillion is needed for the achievement of the Sustainable Development Goals (SDGs),[16] and within this, US$1 trillion is needed annually for clean energy alone. A large number and broad range of projects and assets that contribute to achieving the 17 SDGs need this funding for their development and operation.

One of the SDGs where ‘green finance’ has been successfully mobilised is on clean energy and climate action. The Paris Agreement on climate change entered into force in November 2016, after 196 countries committed to reducing greenhouse gas emissions. Significant quantities of finance are now needed to convert country commitments (Nationally Determined Contributions, NDCs) to implementation and a low-carbon, climate-resilient economy.

Despite recent increases in volumes of climate finance, a significant funding gap will arise unless new sources and channels of finance are mobilised.[17]

Existing international public finance dedicated to climate change is unable to achieve the rapid change required in meeting the finance gap alone. Furthermore, public sector balance sheets do not have the capacity to fund the amounts needed, and so an estimated 80–90% of funding will need to come from the private sector.[18]

Bank balance sheets can take only a proportion of the private finance needed so the capital markets have to be leveraged, along with other sources such as insurance and peer-to-peer.

According to GUIDE: New markets for green bonds, the demand for green bonds has grown quickly on the investor side, with asset owners and managers diversifying their investment portfolios and seeking positive impact beyond financial return. In the light of the global commitment to shift to a green and low-carbon economy, the green bond market has the potential to grow substantially, while attracting more diverse issuers and investors.

Criticism and controversies[edit]

The green bond market has attracted international criticism with some questioning the green credentials of certain bonds.[19] This criticism pertains both to the projects that are funded, as well as the sustainability credentials of the issuers. In May 2017, the Climate Bonds Initiative refused to list a “green” bond issued by Repsol. The bonds proceeds would be allocated to initiatives meant to improve the efficiency of the company’s oil and gas production operations.[20] The NGO argued that - even though the projects would reduce CO2 emissions - the company’s sustainability strategy did not go far enough from an environmental perspective to classify it as green. This criticism was extended to Vigeo Eiris, the ratings agency which certified the Repsol bond’s green credentials.[21] In 2016, Vigeo Eiris was involved in another green bond controversy. The ratings agency was targeted by Western Sahara Resource Watch, an NGO backed by a Norwegian trade union, after it certified a green bond that would fund the production of solar projects by a Moroccan government agency in the illegally occupied territory of Western Sahara.[22]

See also[edit]


  1. ^ a b Yves Hulmann, "2016, l’année de l’essor des obligations vertes", Le temps, 20 December 2016 (page visited on 20 December 2016).
  2. ^ "San Francisco Envisions a Solar City". Retrieved 2001-05-17.
  3. ^ "San Francisco Proposition H Flyer referencing Global Warming". Retrieved 2001-06-13.
  4. ^ "San Francisco Board of Supervisors ordinance authorizing issuance of revenue bonds under the solar bond authority, charter section 9.107.8" (PDF). Retrieved 2012-06-18.
  5. ^ "European Commission - PRESS RELEASES - Press release - EIB launches largest EUR Climate Awareness Bond (CAB) ever". Retrieved 2018-01-03.
  6. ^ "Green Bonds Access Investor Capital to Fight Climate Change". World Bank. Retrieved 2018-01-03.
  7. ^ Climate Bonds Initiative (2017).
  8. ^ "Poland becomes first sovereign state to issue a green bond". Retrieved 2018-01-03.
  9. ^ Environmental Theme Bonds: a major new Asset Class brewing, excerpt from Sustainable Banking – Risk and Opportunity in Financing the Future, edited by Joti Mangat, published by Thomson Reuters 2010
  10. ^ Mathews, Kidney, Mallon, Hughes. Mobilizing private finance to drive an energy industrial revolution. Energy Policy 38 (2010)
  11. ^ Mackenzie, C and Ascui. F. Investor leadership on climate change: an analysis of the investment community’s role on climate change, and snapshot of recent investor activity Archived 2012-04-26 at the Wayback Machine. Published by the UNEP Finance Initiative and UNPRI, 2009.
  12. ^ Iggo, C. Climate Bonds: a major new asset class brewing Archived 2011-03-05 at the Wayback Machine. Published by AXA Investment Managers
  13. ^ a b c GUIDE: New markets for green bonds, the Climate and Development Knowledge Network, accessdate 25 July 2017
  14. ^ Global green bond issuance could rise to USD206B in 2017 after record in 2016, New York, NY: Moody’s Investors Service, Inc. accessdate 25 July 2017
  15. ^ Better business, better world: The report of the Business & Sustainable Development Commission, accessdate 25 July 2017
  16. ^ Sustainable development bonds Archived 2017-02-23 at the Wayback Machine EIIL, 2016
  17. ^ Finance gap: the adaptation report, United Nations Environment Programme (UNEP), accessdate 25 July 2017
  18. ^ The role of the Green Climate Fund in providing the missing “clean trillion”, COP Blog, Environmental Finance, accessdate 25 July 2017
  19. ^ Matsuzaki, Yusuke. "Environmental bonds stained by 'green washing'". Nikkei Asian Review. Retrieved 4 October 2018.
  20. ^ Whiley, Andrew. "An oil & gas bond we knew would come eventually: Repsol: Good on GBPs, not so sure on green credentials". Climate Bonds Initiative. Retrieved 4 October 2018.
  21. ^ Whiley, Andrew. "An oil & gas bond we knew would come eventually: Repsol: Good on GBPs, not so sure on green credentials". Climate Bonds Initiative. Retrieved 4 October 2018.
  22. ^ "The Vigeo Eiris shock: from ethics to occupation". Western Sahara Resource Watch. Retrieved 4 October 2018.

External links[edit]

Government magazine on climate bonds