LONDON Investors will soon be able to buy corporate bonds with a 'climate' certification, much as consumers with strong social and environmental convictions now buy coffee and chocolate products with labels such as Fairtrade and Rainforest Alliance.
Carrying such a certification will enable institutional investors and pension funds, which have been looking to make their portfolios green, quickly to identify environment-friendly bonds without having to do the due diligence themselves.
The 'Climate Bond Certified' standard will initially be aimed at corporate bonds linked to low-carbon assets, said Sean Kidney, executive chair of the Climate Bonds Initiative, a non-profit group backing the standard.
In just a few weeks' time, a corporate bank is expected to issue the equivalent of around $500 million in an asset-backed bond that will carry the certification, the first of its kind.
"It's linked to a portfolio of wind energy loans, which have been reviewed to make sure they relate to wind energy installations in the field," Kidney told Reuters, declining to comment give details about the bond or bank for compliance reasons.
"(Other bonds) are on the road to being certified," he said.
In order to get certified, a bond issuer first has to go through independent auditors, such as KPMG, DNV and Bureau Veritas, to ensure environmental integrity of the security.
Then it needs approval by the Climate Bond Standards Board, represented by institutional investors and non-governmental organizations such as the California State Teachers' Retirement System and the Natural Resources Defense Council, a U.S. environment lobby.
Some of the top institutional investors have been calling for investment-grade bonds where revenue is used to fight global climate change, such as severe drought and flooding.
The International Energy Agency (IEA) has estimated that $140 trillion in clean energy investment is needed by the middle of the century, when governments aim to keep the average rise in global temperatures to below 2 degrees Celsius.
And this is where the $90 trillion global bond supermarket can help, according to an alliance of institutional investors and advisors made up of Allianz, Aon Benfield, Aviva , Legal and General, and Swiss Re .
"As insurers and reinsurers we are conscious of the long term risks that climate change poses to society and how it will affect pricing of weather risk transfer solutions long term," they said in a statement during last year's U.N. climate talks.
But the climate bond market lacks liquidity and standards for due diligence regarding low-carbon investments and how risk is rated in relation to capital requirements, they said.
PRICE, SIZE MATTERS
Whereas consumers may be willing to pay a premium for bird-friendly or other certified coffee, bond investors are unlikely to pay up solely to get a green label on their bonds.
"Investors want a return as well as the ability to believe that their investment is in accordance with any of their personal beliefs," Colin Purdie, a credit fund manager at Aviva Investors, a unit of Aviva, Britain's largest insurer.
"(But) I don't think it's justifiable to pay up just to buy these bonds, because I don't think that's what our investors want at this point," Purdie added.
Bond size also matters, he said: "Certification of and in itself doesn't impact the size of the issue. If you get these issuances to be at a sufficient size -$300-$500 million range - then they are in benchmarks."
Green bonds have raised billions of dollars over the past few years, but most were small in size and off the radar of institutional investors and pension funds.
Certifying a bond for its green credentials, however, can be useful as new issuers enter the market, said Heike Reichelt, head of investor relations at the World Bank, which has issued over $3 billion in green bonds using its own standards and safeguards.
Apart from relying on an independent certification, investors can assess environmental, social and governance characteristics of their investments using internal resources or by way of third party research firms, she said.
Michael Wilkins, a managing director at ratings agency Standard and Poor's, said certification should give investors added confidence both on the environmental and credit fundamentals of a transaction.
(Editing by Jeremy Gaunt.)