CWNYC: A New Blueprint for Building Climate Resilience Bonds

🗽 Climate Week NYC is here!

Climate Proof will report on the hottest adaptation and resilience news out of the Big Apple all week — keep an eye out for bonus newsletters through Friday, and please reach out with your own highlights by replying to this post or messaging Louie via LinkedIn.

Financial institutions and corporates have a new guide for identifying adaptation and resilience investments, one that could unlock trillions in financing for climate-proofing projects.

The Climate Bonds Initiative (CBI) on Wednesday released a new taxonomy classifying over 1,400 activities that are capable of hardening people and businesses against climate shocks. The hope is that it will be used to structure financial products that help plug the growing adaptation finance gap, which the UN estimates to be between US$194-366bn per year for developing countries alone.

“History has shown us that when we standardize things, they scale. Until we start speaking in a common language, [use] common definitions, [and] have standards, it’s really hard,” says Ujala Qadir, Director of Strategy and Programs at the CBI, who steered development of this Climate Bonds Resilience Taxonomy (CBRT).

“[This taxonomy] allows us to unlock critical financing for resilience, helping to protect society, communities, and the most vulnerable from a warming world, while building thriving, resilient economies,” she adds.

The idea is that the CBRT grafts onto the CBI’s existing green bond taxonomy, offering a way for adaptation and resilience (A&R) activities to tap into the US$4.2trn market for green, social, sustainability, and sustainability-linked debt. Prior CBI research found that only 19% of labeled green bonds outstanding have any resilience-related use of proceeds. The CBI hopes to push that percentage up through the new taxonomy.

“There is absolutely no reason why a green bond can’t have A&R use of proceeds — because it’s completely aligned with the green bond principles. Ideally, we will see bonds that are both resilient and green,” says Qadir.

The taxonomy organizes potential A&R investments across seven themes: Resilient Agri-food Systems, Resilient Health, Resilient Infrastructure, Resilient Cities, Resilient Communities, Resilient Industry & Commerce, and Resilient Nature & Biodiversity. 

CBRT Climate Resilience Themes

Each theme is subdivided into sectors and sub-sectors based on where an investment is made. The Resilient Infrastructure theme, for instance, contains the sector “Energy Infrastructure”, which in turn has the sub-sectors “Hydropower Generation”, “Wind Power Generation”, “Solar Power Generation”, and so on.

Investments are also tagged with secondary sectors to capture how they confer resilience benefits. For example, under “Hydropower Generation”, investments in “adjustment of turbine capacity” are listed as bringing positive resilience impacts to “Manufacturing”, “Commercial Trade”, and “Transport Infrastructure”.

A “Climate Hazard Consequence” is assigned to each investment as well so that taxonomy users can see how a given activity mitigates against specific risks — such as wildfire, flood, and heat stress. “Investment Types” are also applied to differentiate between those that “adapt” specified activities directly and those that “enable” the increased resilience of others.

This multi-level structure seeks to accommodate the range of approaches investors and issuers may take to implementing A&R strategies. Says Qadir: “You might want to know what the health benefits are of certain investments. [As an investor], that will be covered in the health theme — like construction of a hospital — through the primary filter. But if you want to understand as a health practitioner what are some adaptation solutions in my hospital that need to be implemented, people can go through the other [secondary sector] filter.”

Qadir is adamant that the taxonomy should not be thought of as a ‘white list’ of approved A&R activities. Central to the classification system are the “interim screening criteria” assigned to each investment, which are used to determine their contribution to climate resilience. For example, the criteria for gauging the A&R benefits of an investment in the “provision of short-term food assistance programs” is the percentage of a given food-insecure population receiving the assistance versus the baseline. In this case, the criteria is used to determine the “additionality” of the investment. If an investment does not make a measurable contribution against its criteria — in this example, to the share of food-insecure people receiving assistance — then it should not qualify as a credible A&R investment.

The purpose of the criteria is to prevent “resiliency-washing” — the promise of climate-proofing benefits from an investment that aren’t brought about in practice.

The criteria are labeled “interim” because, as Qadir admits, the CBRT remains a work in progress: “The criteria, for sure, requires technical depth of expertise that we do not have at this stage to develop,” she says. To remedy this, the CBI is setting up technical working groups that will review and update the proposed screening criteria. It is also working on a user guide for later this year.

The CBRT is the collective output of the 32-member Resilience Taxonomy Advisory Group (RTAG), which was established by the CBI in February. Academics, investors, development bankers, and nonprofit groups all had a say in the design. UK-based consultancy Cadlas served as the lead technical partner.

The next step is for the CBRT to be road tested by investors, bond issuers, policy makers and “anybody who wants to put an adaptation plan together”, as Qadir says.

Experts at the CBRT launch event on Wednesday sounded enthusiastic: “This taxonomy is a beautiful thing — beauty is in the detail. There's so much in it, but we need that detail and comparability so that we're not just creating a climate resilience bond, but the whole green bond market is driving to climate resilience, and the whole blended finance market is driving to climate resilience,” said Jason Spensley, Senior Climate Change Specialist at the Global Environment Facility, who peer-reviewed the CBRT.

Thanks for reading!

Louie Woodall
Editor