Bonds will play a crucial role in financing the transition to a low-carbon, climate-resilient economy. Investor interest in the asset class is growing, but what is the current investment opportunity already out there?
This report, commissioned by the HSBC Climate Change Centre of Excellence and prepared by the Climate Bonds Initiative, presents a first estimate of the outstanding global bond market size linked to key climate change themes, and examines future drivers and trends in the short term.
The Climate Bonds Initiative (“CBI” or “the Initiative”) is an investor-focused not-for-profit organisation, promoting
large-scale investments that will deliver a global low-carbon economy.
We seek to develop mechanisms to better align the interests of investors, industry and government so as to catalyse
investments at a speed and scale sufficient to avoid dangerous climate change.
A key project is the Climate Bond International Standards and Certification Scheme (“Certification Scheme”).
Unlocking Forest Bonds was a workshop hosted by the WWF
Forest & Climate Initiative, Global Canopy Programme (GCP)
and Climate Bonds Initiative on 25 February 2011 in London.
The hosts are very grateful to all those who attended for their
participation and to the organisations that supported the
A further part of the decline in yields on government bonds appeared to
reflect the additional cash in the financial system available to finance
transactions in these and other securities. This was consistent with government
bond yields declining by more than CDS premia.
Banks in Italy and Spain, for
example, used new funds to significantly boost their holdings of government
bonds (Graph 4, right-hand panel). While other euro area banks were less
active in this respect, they may have committed new funds to help finance
positions in government bonds for other investors.
For bonds, debentures, asset-backed securities and
other debt securities, the fair value represents the bid
price provided by independent security pricing
services. Short-term investments are included in the
Statement of Investment Portfolio at their fair value.
Unlisted warrants are valued based on a pricing
model which considers factors such as the market
value of the underlying security, strike price and
terms of the warrant.
In contrast to investment advisers, brokers make recommen-
dations about specific investments like stocks, bonds, or mutual
funds. While taking into account your overall financial goals,
brokers generally do not give you a detailed financial plan.
Brokers are generally paid commissions when you buy or sell
securities through them. If they sell you mutual funds make
sure to ask questions about what fees are included in the mu-
tual fund purchase.
Brokerages vary widely in the quantity and quality of the ser-
vices they provide for customers.
There are many classes of green bonds that have been issued or proposed, and they have taken on a
confusing plethora of names such as green gilts, green retail bonds, green investment bank bonds, green
multilateral development bank green bonds, green corporate bonds, green sectoral
bonds, rainforest bonds and index-linked carbon bonds. One class of green bonds that has attracted
attention recently is the climate bond, which is a type of green bond issued to raise capital for investments
in projects which specifically mitigate or adapt to climate change.
The Climate Bonds Initiative argues for green bond issuance at investment grade ratings, consistent
with risk/return profiles with existing asset allocation requirements, rather than suggesting a premium (or
penalty) rate for the bonds. They propose that governments and IFIs step in to enhance fixed income
offerings tied to climate change solutions to ensure investment grade is achieved.
Governments and leading climate scientists agree that to avoid dangerous climate change, the global average
temperature increase above pre-industrial levels must stay below 2oC.1
A ‘Low-Carbon Economy’ is defined as a world economy operating within these limits.
Even to achieve a ‘likely’ probability – that is at least a 66% chance of success2 – of limiting temperature increase to
this level requires global greenhouse gas (GHG) emissions to reduce by 50-70% by 2050 relative to 1990 levels.
Empirical work, however, finds little support for the result of the ICAPM and documents
the existence of a “home bias”--a situation where investors prefer to invest at home rather than
5 The “home bias” is puzzling because it means that investors are not only foregoing
higher returns from investing abroad but they are also holding a portfolio that is not
sufficiently diversified. Scholars have argued that a large measure of the home bias can be
explained in terms of information asymmetries.
Some pension funds and other institutional investors have already expressed their interest in - or
indeed already are - investing in climate change related assets. Consequently, various industry groups have
been formed in order to increase industry expertise in this area and to engage in a dialogue with
governments to explain the sort of investment environment and financing vehicles which are necessary to
support their greater engagement. They are also exploring how to pool resources in order to achieve the
scale which investment in some of these projects requires. ...
All respondents welcomed the introduction of the Standard as a tool to help catalyse investment in the low carbon economy.
Some comments reflected the need for a better accuracy in the explanation of what the Standard is aiming to achieve. For
example, some interpreted the aims of the Standard for financing of new green assets and as such would require
‘additionality’ tests of some sort. The aim to support re-financing of existing assets was not apparent.
In addition, the explanation of the Standard’s role in relation to the Low Carbon Economy was commented on.
Green bonds are broadly defined as fixed-income securities that raise capital for a project with specific environmental benefits. Most green bonds issued to date have been climate bonds, where the proceeds go to climate mitigation or adaptation efforts.
• Corporate, infrastructure and other projects have reduced access to traditional finance given the financial crisis’ effect on the global financial sector, so debt capital markets represent a key pool of assets that must be tapped in order to finance the transition to a low-carbon, resource-efficient and climate resilient economy.
Extreme weather is hitting all regions of the globe with increasing
severity. Despite the damage that can and will be caused from these
extreme weather events, certain industries will nevertheless benefit
and certain industries will be hurt. It is the purpose of this book to identify
and evaluate the sectors, industries, companies, and more specifically the
particular stocks, bonds, and futures that will be the winners and losers
as extreme weather events continue to impact the Earth. Every investment
idea in this book will work under the current, global climate condition.
What can governments do to support and drive these initiatives further? The most important thing is
to provide clear and consistent environmental policies which will fix market failures and give institutional
investors the confidence to invest in green projects. Without these policies climate finance from the private
sector will not be forthcoming.
Governments need to ensure that adequate, investment-grade deals at scale come to the market in
order to be able to tap the potential pension funds cash.
For the purpose of this review, green bonds are broadly defined as fixed-income debt securities issued
(by governments, multi-national banks or corporations) in order to raise the necessary capital for a project
which contributes to a low carbon, climate resilient economy. To date, these have been issued
predominantly as AAA-rated securities by the World Bank and other development banks and some other
entities in order to raise capital specifically for climate change and green growth related projects.
The World Bank (IBRD) has issued over USD 2.3 billion equivalent of green bonds through 39
transactions in 15 currencies.
These are mostly 3-7 year, fixed and floating rate notes (i.e. which pay a
variable rate of interest), issued via the AAA rated IBRD, designed to raise capital for projects that aim to
combat climate change in developing countries. Projects funded include alternative energy installations,
funding for new technologies that reduce greenhouse gas emissions, reforestation, watershed management
and flood protection.
The World Bank‟s green bonds have been well received by investors since they were structured to
have simple and standard financial features, such as equivalent credit quality and yield levels to other
World Bank triple-A rated bonds so that there is no sacrifice to the end-investor in terms of returns. They
were also issues into a liquid market and can be as easily traded as other „plain vanilla‟ bonds issued by the