Climate resilience bonds are green bonds where the issuer commits to dedicating a portion (or all) of the proceeds raised by the bond issuance to investments that support climate change adaptation and resilience-related assets, projects, and activities (Climate Bonds Initiative, 2021). Most climate resilience bonds are use-of-proceeds bonds issued by governments or multinational banks. The Climate Bonds Standard issued by the Climate Bonds Initiative sets out voluntary guidelines for the structuring and management of these bonds.
The Climate Bonds Initiative launched the Climate Resilience Principles in 2019 to provide guidance on how to integrate climate adaptation and resilience criteria into the Climate Bonds Standard. The principles focus on investments that deal with physical climate risks either by increasing the climate resilience of hard infrastructure or by advancing soft processes (e.g., operational improvements, technology development). The principles require that the issuer/borrower demonstrate that they “understand the climate risks faced by the asset, activity or system in question; have addressed those risks” through the design and implementation of the project; and are regularly monitoring and making adjustments to maintain the asset’s and/or system’s resilience over time (Climate Bonds Initiative, Climate Resilience Consulting, & World Resources Institute, 2019, p. 5).
Current or potential adaptation-relevant sector applications:
- crop and food production – including agroforestry; livestock production; fisheries (marine, freshwater, and aquaculture); irrigation;
- ecological services and management – forest management (including afforestation and reforestation); wetlands; ecosystem and biodiversity protection, conservation, and enhancement;
- water supply (infrastructure) – water management;
- disaster risk reduction – early warning and observation systems;
- energy infrastructure – energy generation (including renewables);
- transport infrastructure;
- other built environment and infrastructure – urban development; tourism (infrastructure);
- social infrastructure – education; health facilities; and
- industry and manufacturing.
Additional insights:
- This is an emerging instrument, with the first climate resilience bond issued by the European Bank for Reconstruction and Development in 2020.
- The Climate Bond Initiative (2021) reported that 1,265 green bonds, or 16.4% of green bond deals, that had been issued as of September 2020 included climate resilience components, mostly in the water and water-related sectors. Only 6% of these issuances were from developing countries.
Considerations for issuing climate resilience bonds:
- The bond’s proceeds need a robust pipeline of adaptation and resilience projects, and it can be challenging to identify eligible projects.
- Government engagement is required to prioritize adaptation actions. A robust national adaptation plan can assist with establishing a pipeline of investments.
- Bonds are not appropriate for all borrowers/issuers, especially in countries that may not be able to take on additional debt.
- Guarantees may be needed to increase investors’ confidence in bonds issued in developing countries.
- Most bond issuances in developing countries with links to climate resilience have been undertaken with technical assistance support from development partners.
- While there have been significant advances in the identification, evaluation, and reporting of climate resilience-related investments, continued work is needed to further these practices, which are necessary to raise finance through the green bond market.
Adapted from the following sources:
Climate Bonds Initiative. (2021). Green bonds for climate resilience: State of play and roadmap to scale. Global Center on Adaptation and European Bank for Reconstruction and Development. https://gca.org/reports/green-bonds-for-climate-resilience-state-of-play-and-roadmap-to-scale/
Climate Bonds Initiative, Climate Resilience Consulting, & World Resources Institute. (2019). Climate resilience principles: A framework for assessing climate resilience investments. https://www.climatebonds.net/files/page/files/climate-resilience-principles-climate-bonds-initiative-20190917-.pdf
Organisation for Economic Co-operation and Development. (2022). Green, social, sustainability and sustainability-linked bonds in developing countries: How can donors support public sector issuances? OECD Publishing. https://www.oecd.org/dac/green-social-sustainability-and-sustainability-linked-bonds.pdf