What is the Climate Bonds Initiative?    

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by Aaroshi Rathor
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Anthropogenic climate change is real and now a fact in our day-to-day lives. So, the single biggest question is how can we effectively address it? Herein lies the function of the Climate Bonds Initiative (CBI). So, what exactly is CBI, what is its contribution to the fight against global warming, and how can it aid in the transition to a sustainable society? Let’s find out.     

What is the CBI? 

The Climate Bonds Initiative is an international organisation working to mobilise global capital for climate action. Supported by a 50-member Advisory Panel, CBI has an international stakeholder base among institutional investors, NGOs, and the finance sector. 

The primary objective of CBI is to invest in initiatives and resources needed for a quick shift to a low-carbon and climate-resilient economy. In order to accomplish this goal, CBI chooses a practical strategy that entails growing aggregation mechanisms for dispersed sectors, supporting governments looking to access debt capital markets, and developing a sizable and liquid green and climate bonds market that will help lower the cost of capital for climate projects in developed and emerging markets. 

CBI helps its partner organisations with the know-how and resources necessary to navigate, sway, and spark change.   

How does the CBI function? 

Green bonds have been a popular form of funding for sustainable development, thanks to CBI, which has improved the quality of issuance by creating scientifically sound green standards that follow the Paris Agreement

In light of this, CBI works with several international stakeholders, such as governments, investors, banks, and big businesses, to advance sustainable finance. In addition, they support the development of green capital markets, analyse the market for green bonds, and provide the only certification programme for sustainable debt globally under the Climate Bonds Standard. They also promote significant improvements in the financial sector by offering nation-specific market development initiatives to support sustainable debt markets in Brazil, China, India, and other nations. 

They encourage public and private issuers to enter the market and promote programmes that bring investors and issuers together to learn about prospects for sustainable investment, and also give technical assistance and capacity-building training across a variety of markets.   

Here's a helpful further explainer via the CFA Institute.

How is the CBI helping in the transition towards sustainability? 

The CBI is a non-profit organisation with a global investor focus that wants to issue USD 5 trillion annually by 2025. It uses four primary steps to measure its sustainability initiatives for this aim

1. Market Intelligence and Analysis 

It is critical to evaluate the market and the factors that affect a project's long-term viability if it is to be considered sustainable and lucrative. The climate-aligned bond market is tracked by CBI. For this reason, they track post-issuance reporting, green bond pricing in the primary market, league tables for green bond underwriters, and stock exchanges with green or sustainability bond categories. 

They report on the green bond market and publish thematic reports on particular market areas. Since 2018, they've also offered a bond library for new issuers, and conduct an annual study of all outstanding global climate change bonds in order to clarify the bond market. The report is delivered annually at conferences across many nations and at briefings for investors and banks.  

2. Certification in Sustainable Debt under Climate Bonds Standard

The Climate Bonds Standard Board, an independent body that offers an overview of the implementation and administration of the Climate Bonds Standard & Certification Scheme, is where the CBI offers specific certification for sustainable debt. The Board of the CBI reports to the Governors. The Board evaluates all guidelines and material pertaining to the strategic development of the Scheme. 

Consensus is used to carry out decisions and it is crucial to remember that the Climate Bonds Standard and Certification scheme is a simple labelling system for bonds and loans that can be used by investors, governments, bond issuers, and financial markets to help prioritise investments that openly contribute to the climate crisis problem.   

a. Climate Bonds Taxonomy and its purpose in reaching 2050 net-zero goals 

The CBI provides a taxonomy for climate-aligned assets and initiatives called Climate Bonds Taxonomy as part of its Climate Bonds Standard and Certification system. It is a simple instrument that makes it easier for issuers, investors, governments, and municipalities to comprehend important investments that will result in a low-carbon economy. They can use it to find assets that fit within a low-carbon economy. 

b. What is the goal of the Taxonomy? 

The taxonomy was created with the use of the most recent climate scientific tools and the stakeholder approach. The climate bonds taxonomy's major objective is to serve as a valuable source for universally accepted green definitions on international financial markets, in a way that promotes the development of a unified theme bond market that results in a low-carbon economy. 

To determine whether identified assets and initiatives are automatically compatible with a 2-degree decarbonisation trajectory, require additional investigation, or are automatically incompatible, the taxonomy uses a traffic signal system. 

c. Where can climate bond taxonomy be used? 

The climate bonds taxonomy tool is another resource that institutional investors can use to make sure their debt-based investments are helping to combat climate change. This is because the tool is constantly updated with new technologies and sector-specific criteria that provide in-depth detail of assets so that investors can look to finance climate-certified bonds and loans. 

Any company wishing to determine which assets, operations, and related financial instruments are compatible with the trajectory to net zero by 2050 can use the tool.  

Related: What are ESG Bonds? All You Need to Know

3. Green Bond DataBase Method

Whether or not a green bond is suitable for CBI’s Green Bond Database Methodology depends on a particular set of precise requirements. The screening uses a modified sector list rather than the taxonomy indicators and refers to the Climate Bonds Taxonomy. 

There are three criteria used to determine eligibility. The first is whether the instrument is a debt one, such as a bond or security loan. Second, whether it is self-labelled, which excludes transactions that finance the proper kinds of assets, projects, and activities but are not self-branded by the issuer. The third method uses open disclosure to ascertain whether the financed assets, projects, and activities are green and to permit the inclusion of the debt instrument, particularly an outstanding balance and a confirmation of close or settlement (issue date). 

Following completion of the initial screening process, the process further assesses the assets, projects, and activities being funded to determine whether the debt justifies inclusion in the CBI Green Bond Database or in a different database run by CBI called the Social and Sustainability Bond Database. 

Related reading: Green Bonds: Types, How To Buy, and FAQs

4. Social and Sustainability Bond Database

To complement its collection of Green, Social, and Sustainability (GSS+) debt databases, CBI also offers a Social and Sustainability Bond Database (SnS DB). This database's primary goal is to increase openness regarding global social and sustainability debt, from deal-level analysis to the detection of broad market events and patterns. As the market changes, the database will too. 

Climate Bonds, which also filter self-labelled debt instruments, work similarly to green bonds in determining which bonds and other financial instruments qualify for inclusion in the Social and Sustainability bond database.  

Takeaway

The CBI offers a measurable and comparable sustainability standard that can aid in the achievement of global sustainable goals. 

Governments must create a transition-friendly policy environment in order to do this. Approving clear transitional paths, ensuring future demand for financeable climate solutions, and tackling risks in places where the private sector is unable to act are all examples. 

In addition to often obtaining cheaper funding, issuing sovereign green bonds demonstrates strong government leadership that facilitates market creation and development through scale. Business groups and investors who desire open, verifiable sustainability data that can be compared across industry standards will find CBI to be a useful tool. Through CBI, one can promote global green investments, significantly lower carbon emissions, and long-term plans for the creation of sustainable green cities. 

Equally, to spread sustainability measures in other sectors, CBI should consider funding crucial sectors like healthcare and biodiversity in addition to catering to existing climate finance projects and bonds aimed at contributing towards climate action. CBI is a crucial instrument that must be adopted and used by all sectors, not only those with a stake in climate change, in order to achieve the global net-zero goals by 2050.  

To read more informative articles on ESG, visit our Featured Articles page. Read more on Sustainable Finance here.

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