The greening of bonds. Good news for investors & climate change
Sustainable financing solutions are growing both in size and scope. Green bonds or ‘climate bonds’ are on the rise: Last year USD168 billion of them were issued globally. As of this October, over USD200 billion of them went to market, snapped up by the increasing amount of investors looking to make returns and support beneficial impacts on the planet.
But what makes a bond a climate bond? Environmental sustainability can be subjective. A debt offering that finances the development of a nuclear power plant may be perceived as sustainable to one person and anything but to the next.
Climate bonds need to be measured against rigorous, transparent and objective standards – otherwise their issuers will be accused of ‘green-washing’ and the market for environmentally sustainable investments will disappear – and that would be nothing short of a tragedy.
Since 2010 KPMG has worked with international organisations and parties to foster the development of green bonds and other sustainable finance solutions. The Climate Bonds Initiative is an investor-focused not-for-profit promoting investment in projects and assets necessary for a rapid transition to a low carbon and climate resilient economy.
They have developed a Climate Bonds Standard, an easy-to-use tool that allows investors and intermediaries to assess the environmental integrity of bonds claiming to address climate change mitigation and adaptation. It provides clear, sector-specific eligibility criteria for assets and projects that can be used for Climate Bonds and Green Bonds.
No matter what sector the bond applies to – energy, agriculture or transport – it must be consistent with the 2 degrees Celsius warming limit as set out by the Paris Agreement. These following steps show how that is assured under the Climate Bonds Standard – so that a bond can be truly green.
Steps to develop a green bond
Prepare the Bond
To accredit a bond, the issuer compiles supporting information and creates a framework to indicate how the proceeds of the bond will be used. Contrary to popular belief, climate bonds do not need to finance clean energy projects – only just over 30 percent of them do. Energy efficient buildings (residential or commercial) and transport projects both represent about 20 percent of climate bond offerings – with the remaining 30 percent representing projects in water, land use and waste.
Engage a Verifier
Certification is available for assets and projects that meet the requirements of the Climate Bond Standards. In order to receive the “Climate Bond Certified” stamp of approval, a prospective issuer of a Green or Climate Bond must appoint an approved 3rd party verifier, who will provide a verification statement that the bond meets the Climate Bond Standard. This involves verification of the use of proceeds, process for project evaluation and selection, the management of proceeds and finally the reporting process according to the sector criteria. For example, a solar energy project cannot have a fossil-fuel back up component that accounts for more than 15 per cent of the total energy produced and commercial buildings must remain in the top 15 per cent in terms of emissions performance in its respective city.
Get certified and get ready to issue the bond
Once the verifier completes a report, it is submitted to the Climate Bonds Institute, which issues a certification if all criteria are met. This means the issuer can market the bond as a climate bond. But they must also make a version of the verifier’s report public so potential investors can scrutinise the details of the offering.
Confirm the certification post-issuance
To secure investor confidence in the validity of the climate bond, the verifier conducts additional analysis of the bond after it is issued. The proceeds of the bond are tracked and any changes to the project can be made with ease as long as they still meet sector criteria.
Simple annual reports are made public to ensure commitments made when the bond was issued are maintained throughout the term of the security.
Our Australian KPMG Climate Change and Sustainability Services team has provided carbon verification services for many years under large number of different frameworks. As of 14 August 2019, KPMG Australia has become an accredited verifier of green bonds with the Climate Bonds Initiative. We are proud to be helping Aussie companies mobilise capital for ambitious climate action.