The International Emissions Trading Association has floated the idea of hybrid green sectoral bonds aimed at “mainstream” institutional investors to help finance low carbon development in developing countries.
The idea is to tap into the world’s estimated $12trn of pension fund and $3.5trn of sovereign wealth fund assets. It reflects what the IETA says is the failure of existing green bonds – issued by the likes of the World Bank – to stimulate “material sums” of private capital.
The IETA says it has found a significant appetite from institutional investors for bond investments related to carbon abatement and mitigation projects if they have acceptable risk-return profiles.
“New approaches, new instruments, and different investors need to come into the game,” the 171-member body states in a 10-page note released today, coinciding with the Carbon Expo event in Cologne.
The core of the idea is that bonds would be issued with a low-coupon conventional return, guaranteed by International Financial Institutions, and a stream ofcarbon credits. These would be tied to the host country’s reduction target in a given economic sector such as transportation. If the targets aren’t met bondholders don’t get carbon credits and the host’s borrowing costs rise. Part of the concept involves the creation of a new international entity to administer the mechanism.
“Over and above sectoral carbon crediting, green sectoral bonds have the potential to unlock significant amounts of currently untapped resources from capital markets into climate abatement and mitigation projects,” the IETA says.
The new bonds would attract investors who are accustomed to using the commercial and sovereign bond markets but who have not previously been interested in the Clean Development Mechanism [CDM] or other carbon market instruments.
“These are ideas, not worked-up proposals,” said IETA CEO Henry Derwent. “But the existing CDM seems less and less able to meet the low-carbon investment needs in developing countries.”