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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. The total volume of climate bonds was estimated at 160 billions of dollars on 2016; of which 70 billions were issued in 2016.
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.
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.
In their UNEP paper on investors and climate change, Mackenzie and Ascui 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.
- 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.
In February 2016, Apple Inc. issued a US$1.5 billion green bond, the first ever of its kind by a U.S. tech company. The green bond proceeds are dedicated to the financing of environmental projects.
- Yves Hulmann, "2016, l’année de l’essor des obligations vertes", Le temps, 20 December 2016 (page visited on 20 December 2016).
- 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
- Mathews, Kidney, Mallon, Hughes. Mobilizing private ﬁnance to drive an energy industrial revolution. Energy Policy 38 (2010)
- 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. Published by the UNEP Finance Initiative and UNPRI, 2009.
- Iggo, C. Climate Bonds: a major new asset class brewing http://www.axa-im.com/index.cfm?pagepath=research/ri_inside_research/green_initiative&CFNoCache=TRUE&servedoc=82A0C89C-1708-7D7E-1BEE7FCB1BA8F25F. Published by AXA Investment Managers
- "Environment - Reports". Apple. Retrieved 2016-05-28.