Climate bonds and the City of Cape Town

By Lea Sarah Kulick

How can issuing a climate bond contribute to driving climate responses across the different departments of the City of Cape Town at the operational level? What kind of positive climate impact does a climate bond deliver? These questions are part of my dissertation research for which I came to Cape Town to do an internship with African Climate and Development Initiative (ACDI) and the city council government.

How did that even happen? I am not an expert in financial mechanisms whatsoever. During my MSc in Climate Change and International Development at the University of East Anglia in the UK, I had one lecture on international climate finance and climate bonds or green bonds  not even been mentioned back then. This whole world of finance was quite daunting to me and yet, when I looked at the different projects that I could combine with the research for my dissertation, the topic somehow fascinated me. There is so much talk about regarding the ‘financing gap’ and tapping into the private sector for climate financing and how this can look like in practice that I wanted to know more about.

The City of Cape Town has recently started to explore the possibility of issuing a green bond and I had the opportunity to be involved in the process. But firstly, for the benefit of everyone who felt like me when I first heard of the term climate bond, here’s a short explanation:

Just like normal bonds, climate or green bonds can be issued by governments, multi-national banks or corporations and investors who can buy these bonds. The issuing entity guarantees to repay the bond over a certain period of time including an interest rate. Governments bonds are usually evaluated as a secure type of investment and local governments frequently use bonds to raise money, similar to a bank loan. The special thing about green bonds is that the proceeds of the bond are allocated to ‘green’ projects, e.g. solar energy.

And what is the difference between a green bond and a climate bond? Green bonds can be seen as the overarching category of bonds which are used to finance environmental projects. Climate Bonds fall under the category of green bonds and have been established by the Climate Bonds Initiative, an investor-focused not-for-profit. They are specifically used to finance projects to address climate change that are consistent with delivering a low carbon and climate resilient economy. They range from wind farms and hydropower plants, to rail transport and building sea walls in cities threatened by rising sea levels. The demand for green bonds has been growing rapidly with total issuance increasing tenfold from $3bn in 2012 to $35bn in 2014, which demonstrates the strong investor interest in low carbon and sustainable investment commitments. At present, the climate bonds market has an estimated value of $346bn. In Africa, the African Development Bank launched an inaugural Green Bond of 3-year USD 500 million in 2013 and the first city was Johannesburg in 2014 with the issuance of a ZAR 1.46 billion Green Bond.

A critical issue around the green bonds is how to ensure that the proceeds are actually used to make a positive climate impact. There is no single internationally agreed standard but several voluntary ones that issuers can adhere to in order to ensure the trust in the ‘green’ label of projects. The ‘Climate Bonds Standards’ are an example for this kind of certification which was established by the Climate Bonds Initiative (CBI) and consists of verifying the issuer’s processes by an external consultancy. The City of Cape Town attaches a lot of importance to the accreditation of the possible green bonds and cooperates with CBI to increase the City’s credibility in its commitment to climate change mitigation and adaptation.

However, even when the ‘Climate Bond’ label is issued there are certain aspects that can be examined critically. There are Climate Bonds Standards for different sectors, such as energy, transport, water etc. Let’s take the transport sector as an example: one of the Climate Bonds Standards criterion for Bus Rapid Transport Systems is that the project will substantially reduce greenhouse gas emissions per passenger-kilometres. A project on the purchase of electric buses immediately qualifies without any further investigation. But in the case of South Africa, the vast majority of electricity in the grid is generated through coal power plants, and the use of electric buses will not contribute to a cleaner form of transport! Therefore, it can be questioned whether such international standards make sense in a local context.

Furthermore, I have asked myself what kind of additionality in terms of a positive climate impact is actually created through the issuing of a climate bond. Do projects need to be changed to be eligible for green bond financing or is it only a matter of flagging that the project can be labelled green without amplifying the mitigation and adaptation aspects? Does a climate bond actually stimulate any new climate projects or is it solely a matter of re-financing existing ones? Is there any added value for the city in terms of mainstreaming climate change considerations within its projects?

At an international level, green bonds have been critiqued as a ‘greenwashing’ tool that looks great in fora such as the C40 Cities’ Mayors Summit (that has been given an award to the City of Johannesburg for issuing a green bond) Meanwhile, this green bond has no Climate Bonds Certification and the use of the proceeds are rather questionable in terms of their green aspects.

These questions are among those that I want to analyse to complete my understanding of the green/climate bonds as financing mechanism for cities in the Global South. Cape Town serves as my case study and I particularly focus on the possible value of the climate bond as a mainstreaming tool at the operational level. Although it was a lot of work for me to understand all the financing terminology and the practical application of the Climate Bonds Standards I am glad that I opted for this research project. It encouraged me to look into issues that did not seem to be my cup of tea in the first place.

Disclaimer: The views expressed here are solely those of the author in her private capacity