Climate Bonds

Climate bonds are bonds issued by a government or corporate entity in order to raise finance for climate change mitigation or adaptation related projects or programs.

In their UNEP paper on Investors and climate change, Mackenzie and Ascui¹ differentiate a climate bond and from a green bond:
“(A climate bond is) an extension of the green bond concept. Green bonds are issued by a government or corporate entity in order to raise the finance for an environmental project. Climate bonds would be issued by governments (or others) to raise finance for investments in emission reduction or climate change adaptation.”

Like normal bonds, the issuing entity guarantees to repay the bond over a certain period of time, plus either a fixed or variable rate of return. The difference is that climate bonds are usually asset-backed, or ring-fenced, with investors being promised that all funds raised will only go to climate-related programs or assets, such as renewable energy plants or climate mitigation focused funding programs.

Climate Bonds are "theme" bonds, similar in principle to a railway bond of the 19th century, the war bonds of the early 20th century or the highway bond of the 1960s.

Theme bonds are designed to:

• 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 tradeable, 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.