The Paris Climate Bond (PCB) financing concept, developed by London-based green finance firm Climate Mundial and global law firm Baker Mckenzie*, takes some familiar financing concepts – project finance, aggregation and securitisation – and gives them a useful application to support international cooperation on climate change.
Firstly, the financing structure ties projects and bond issuances directly to carbon certification and verification mechanisms approved by the UNFCCC. This includes existing mechanisms such as the Clean Development Mechanism (CDM) and future mechanisms set to be created under the Paris Agreement’s Article 6. This ensures that the use of funds is verifiably ‘green’ and can be measured as such without any double-counting or double-claiming, and where environmental integrity is certified using multilateral standards. The lack of such guarantees in many green bond issuances is the cause of some scepticism among observers about the quantity of real and verifiable environmental benefits being delivered as that market grows.
Second, PCB finance is directly linked to the implementation of NDCs in developing countries, whether that is through funding infrastructure and other projects on the ground, or through the generation of carbon units for international transfer against national mitigation commitments under the Paris agreement.
(It’s been a consistent concern of this blog that too much ‘green finance’ is divorced from the Paris agreement and the NDCs, when developments such as the recent meltdown at the GCF highlight the risk to Paris if the funding promised for NDC implementation – both public and private – fails to appear, so this direct tie to NDCs is a particularly welcome feature in our view).
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So how does PCB work? The answer is at two levels, the initial project financing and the subsequent aggregation of projects for securitisation and refinance.
- At the project finance level, a PCB entity will make loans to projects registered with current and future mechanisms of the UNFCCC in target developing countries.
- A PCB Investment Vehicle will then purchase these PCB loans and – most likely once projects are up and running, so their development risks are past – issue an appropriate range of capital markets instruments, including PCB commercial notes, to finance these purchases.
The PCB investment vehicles could be listed, offering immediate liquidity for investors. This, combined with the de-risked and long-term nature of the instruments issued, which could also be of a good size (in the hundreds of millions of dollars at a time), would enable the widest possible access to mainstream institutional investors, for whom the mantra for investment is “big and boring.”
The PCB concept thus takes account of the “upstream” and “downstream” gradations of the finance and investment spectrum, which are all too often ignored. According to Daniel Rossetto, chief executive of Climate Mundial, “the PCB approach enables structuring of public and private finance to allocate risk and return in ways that can attract investors who, today, are not investing in climate-friendly infrastructure in developing countries. PCB therefore overcomes a market failure.”
The PCB concept thus captures many key elements for optimised NDC finance: use of carbon pricing mechanisms with full MRV capabilities; a direct linkage to the NDCs; the blending of public and private finance for risk allocation; and the eventual issuance of aggregated, diversified, ‘plain vanilla’ and long-term instruments that should be attractive to the international capital markets.
As such it seems a promising step forward, and we will report with interest as projects start to materialise. UNDP and Climate Mundial are working together under a framework partnership for global deployment of the PCB structure, which both hope will address a large portion of the significant and un-met needs of developing country NDCs, whilst providing all stakeholders, be they domestic or international, certainty over the mitigation outcomes that result.
You can listen in to and explanation of the PCB in the recording of this webinar
*UNFCCC and the Executive Board of the Clean Development Mechanism have also contributed to developing the concept under the auspices of the ‘other uses for the CDM work program’ of the CMP.