Climate bonds: everything you need to know

Certified Climate bonds are verified bonds according to the Climate Bonds Standard. These criteria ensure that the certified bonds are conform with the 2015 Paris Agreement. 

Climate Bonds

It is a credible and robust standard that allows corporate bonds to be associated with low-carbon activities, without compromises on the normal credit ratings of issuers. It shows investors that the issued bonds offers a climate change solution opportunity, which broadens the potential investors in the product. When the certification is obtained, the issuer can show investors that the use of proceeds are aligned with the Green Bond Principles and are being used in line with delivering a low carbon economy.

The certification is received prior to issuance of the bond. It provides transparency towards investors and shows that all requirements are met to deliver a quality product that meets the growing demand for green bond and climate bonds. 

Use-of-proceeds bonds are the most issued Climate Bonds. The raised funds of these types of bonds are used for a specified climate-related program or asset. The issuer guarantees investors that they invest directly in climate change solutions.

There are different types of use-of-proceeds bonds, such as project bonds, asset-backed securities and covered bonds.

Certified bonds raise funds for several types of climate change solutions. The Climate Bond Institute has drawn up a list of 11 sectors that are available for certification. They each have different criteria that the green bond framework should meet and contribute to achieving the Paris Agreement goals. Sustainable Capital Group works mostly within the Low Carbon Buildings, Low Carbon Transport, Solar Energy, Wind Energy and Protected Agriculture sectors.

The Climate Bond Institute continues to expand the possible investment areas and are currently developing criteria for the following sectors: land use, hydropower, waste management, shipping, information technology and broadband, fisheries, agriculture and electricity transmission and distribution grids and related infrastructure.

Many different types of organisations can issue Certified Climate Bonds. The focus lies on the product meeting the Paris Agreement requirements and thus are consistent with the 2 degrees Celsius warming limit. Examples of types of organisations that have issued green bonds are banks, (local) governments and project developers.

Organisations can issue corporate bonds, portfolio bonds or project development bonds, as long as they meet the relevant requirements for each type.

Certification process of Climate Bonds

The certification process is divided into 5 steps.

  1. Preparing the bond
  2. Engaging a verifier
  3. Getting certified and issuing a Certified Climate Bond
  4. Conforming The Certification post-issuance
  5. Reporting Annually

The image below explains the steps within this process.

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Benefits of Climate Bonds

Issuing green bonds that are certified according to the Climate Bonds Standard has several benefits, for both issuers and investors.

For issuers, the certification shows the market that their bonds meets one of the highest standards in terms of climate integrity, transparency and proceed management. They are issued conform the goal of zero net emissions by or before 2050.

The green bonds also contribute to a broader investment portfolio, which leads to a larger range of interested investors compared to bonds that do not prioritise making a contribution towards a more sustainable future. The increased investor demand in the product often leads to investors holding their debt for a longer period and sometimes even pricing benefits.   

Specifically having a widely recognised certification, makes it much easier for potential investors to find and invest in credible green bonds that prove to meet strict sector specific requirements. This also enhances the reputation of the issuing organisation as it shows the market that sustainability and securing prosperity for future generations is a priority.

Additionally, issuing Certified Climate Bonds is associated with lower costs than obtaining a second opinion. 

For investors, there are also numerous benefits associated with Certified Climate Bonds. It is less costly and more time-efficient, since the associated costs of conducting environmental due diligence to screen bonds can be avoided. Investors do not need to analyse low-carbon credentials of investments themselves. since the Certification ensures greater consistency and transparency.

It is also an opportunity for investors to invest in bonds that guarantee to prioritise sustainability. Investors can participate by showing the market that they are interested in suitable risk-adjusted green deal-flows, that they are willing to invest in this low-carbon transition in line with the Paris Agreement and that by doing so, they are willing to proactively hedge against future climate associated risks. 

Do you want to know more about climate bonds or sustainable investments? Contact us directly.