New types of green bonds bring transparency and finance to climate action

Late last year, the EBRD launched the world’s first climate resilience bond and became one of a handful of institutions to issue a green transition bond. We did this to set robust and useful precedents for issuers and investors to follow and to signal to a broader range of organisations that green bond markets can also be a source of finance for them. Done well, these instruments bring several benefits. By building issuers’ capacity to identify and track green expenditures and activities, these new kinds of green bonds better equip them to understand their exposure to climate risks and identify needs for action and new business opportunities.

By increasing transparency and trust in the market, these bonds can also help finance the transformation of sectors that present serious technical and economic challenges to achieving the Paris goals.

For instance, our green transition bond will finance resource efficiency in high-energy use industrial sectors central to the transition to a zero carbon economy that have barely featured in the use of proceeds for green bonds till now.

They include steel and cement production, chemicals and mining, sectors on which electric cars, solar panels, wind turbines and green buildings depend.

Elsewhere, recent floods and fires are a powerful reminder that extreme weather events will occur more and more regularly, and that climate resilience investments must grow rapidly.

Yet, while estimates put the investment required to adapt to an already warming planet at an average of US$ 180 billion annually over the next ten years, adaptation finance reached just US$ 30 billion per year on average from 2017-2018.

Our climate resilience bond will help to address this by, for instance, financing improvements to reduce the vulnerability of a port to increased incidence and severity of extreme weather, thereby reducing money lost from damage to critical infrastructure and disrupted business operations.

As ever, the devil is in the detailed work undertaken to ensure that underlying assets meet rigorous requirements for inclusion.

We include safeguards so that projects financed to adapt to an already warming planet do not undermine countries’ ability to meet the mitigation goals of the Paris Agreement.

Ongoing standardisation will further increase issuer and investor confidence. The EU Taxonomy includes detailed guidance on which low-carbon activities, carbon transition activities and climate resilience activities meet its criteria and will inform the forthcoming EU Green Bond Standard.  These and other international guidelines are influencing global green bond markets.

In the same way that green bonds have made issuers and investors familiar with sustainable assets in already low-carbon sectors, green transition and climate resilient bonds show how they can broaden their impact and scale up action rather than having too narrow a focus.

The amount of money raised through the bond markets for the response to Covid-19 shows the flexibility of labelled bonds so, while, for now, some investors are not fully comfortable with transition-labelled financing, we expect further credible issuers will emerge in different green bond categories to continue to build understanding and grow the market.

Continued demand for both issuances has enabled us to increase their size, with the climate resilience bond up to US$ 1.1 billion from an original US$ 700 million and the transition bond up to €625 million from €500 million.

Carel Cronenberg, Associate Director – MRV Manager EBRD

Share Button