Certifying the ‘Climate’ in climate bonds

Abstract

In recent years institutional investors—and particularly state-owned funds, such as pension funds and sovereign wealth funds—have become focused on the impact of climate change for their portfolios. The interest stems from two primary, related requirements. First, many institutional investors are recognizing that the maximization of risk-adjusted returns requires them to take into account the long-term effects of environmental, social, and political risks associated with climate change. For these investors, recognizing these risks is simply a function of the goal—in some cases, a fiduciary imperative—to maximize the welfare of the beneficiaries of the fund. Secondly, many investors (and state-owned investors in particular) recognize that investment in climate-related infrastructure and other opportunities often provides relatively attractive returns in a low-interest rate environment. These two requirements are, for many investors, essentially bound together. An investment that provides high returns but creates significant long-term (and uncompensated) environmental impacts is not acceptable, nor is an investment that produces public goods but loses money for the fund itself.