A study by researchers at Griffith University has found that investors are keen to buy green bonds designed specifically to provide funding for the costs of climate change adaptation but there are a range of barriers that currently prevent this type of financing.
The study, titled Mechanisms to finance climate change adaptation in Australia, was commissioned by the National Climate Change Adaptation Research Facility (NCCARF). The research project was based on extensive interviews with representatives of institutional investors, bankers, insurers, consultants, advisors, legal experts and all levels of government. The Australian Coastal Councils Association was one of the organisations which participated in the study.
In an article published by The Conversation, Dr Zsuzsa Banhalmi-Zakar, the lead researcher of the study and Dr David Rissik, the General Manager of NCCARF, say the costs involved are so substantial that Government at all levels will not be able to pay for adaptation. Therefore, there is a need to think about how best to promote adaptation as an opportunity for the finance sector.
The research indicates that investors are looking for investment in bankable and scalable projects such as those that can help Australia adapt to climate change and mitigate its effects, but which also generate a return on investment.
As the research report points out, however, there are no agreed means of demonstrating when a city, infrastructure or coast has successfully adapted to climate change. So not only are there no standards around green bonds for adaptation, these type of bonds don’t yet exist in Australia.
Dr. Banhalmi-Zakar and Dr. Rissik note that the bonds issued by governments and corporations to raise capital for projects are different to bank loans. They are issued over a specific time and have a set face value when issued that is paid back upon maturation.
Most green bonds demonstrate green credentials through projects that reduce carbon emissions, which mitigates climate change. Green adaptation bonds would incorporate elements or projects that ‘climate-proof’ investments or increase resilience to extreme events caused by climate change.
The article in The Conversation observes that green bonds have performed extraordinarily well in the market. The global value of green bonds (at issue) has increased from US$11 billion in 2013 to more than US$36 billion in 2014 and almost US$56 billion in mid-2015.
Dr. Banhalmi and Dr. Rissik say one of the key problems in getting green adaption bonds financed is that the bulk of responsibility for adaptation falls on local governments, which typically do not have the means to negotiate directly with investors, let alone access private sector funds.
Yet the research findings provide some hope that private sector financing for adaptation can become a reality. As indicated in the final report of the research project:
‘The benefit of financing adaptation through bonds is that the private sector is already experienced with this mechanism and that bonds are particularly targeted at large-scale projects (or group of projects). A limitation of bonds is that they require sizeable projects (i.e. costs over $25 million) to be feasible, therefore they can only apply to adaptation projects that are scalable.’
The final research report is available at – https://www.nccarf.edu.au/content/research-projects