More Than Green: Leveraging Green Bonds to Invest in Greater Climate Resilience


(The RAND Blog)

Stock market trends overlaid on picture of houses with solar panels, photos by BAIVECTOR/Adobe Stock and ebobeldijk/Getty Images

Images by BAIVECTOR/Adobe Stock and ebobeldijk/Getty Images; design by Monica Hertzman/RAND Corporation

by Karishma V. Patel and Michelle E. Miro

November 24, 2021

This is one in a series of commentaries on environmental finance and green bonds.

The COP26 summit in Glasgow underscored the importance of climate resilience as a key policy goal around the world. As governments, businesses, and other entities look for capital to help meet their climate resilience goals, green bonds could represent an opportunity to attract and leverage new private finance and catalyze local markets to support public climate resilience initiatives. Simultaneously, investors have a growing interest in providing capital to fund green bonds, and demand for investing in green bonds has begun to surpass the available supply. Given this heightened interest from both issuers and investors, green bonds could emerge as one key source of capital to help facilitate the necessary energy, land, ecosystem, infrastructure, and industrial system transitions to build resilience in the face of climate change.

At the same time, if the use of green bonds to finance climate resilience increases, it could be necessary to ensure these investments are in fact contributing to greater resilience in the nations, regions, or communities they support. The significance of green bonds may depend not only on having a lot of them but also on carefully developing, investing, and tracking projects against the larger goal of climate resilience. This leaves policymakers, practitioners, and researchers in this space with a key question: how can these bonds contribute to greater climate resilience over time?

The Challenge of Defining and Measuring Climate Resilience

Climate resilience is an iterative, continually evolving process for managing climate change (PDF) and its risks. Projects and activities that foster lasting climate resilience vary widely by geography, the built environment, and community values, among many other factors. The scope of climate resilience projects may focus on physical assets, such as reinforcing a dam, elevating buildings, or updating building codes to reduce flood risk. Other projects may focus on systems, such as introducing a national data infrastructure to monitor and improve operations, funding research and development for new technologies, or providing economic, health, or other social services to support population resilience to climate change.

Given its broad mandate, defining and measuring climate resilience for everyone and everything is a challenge. Unlike climate change mitigation, which seeks to reduce greenhouse gas emissions, the goals of climate resilience are highly dependent on context. In light of these challenges, one important step in leveraging green bonds for climate resilience is developing and applying appropriate criteria to measure, monitor and evaluate the impact of green bonds.

Lessons from Measuring the Impact of Green Bonds

Exploring how green bonds are currently tracked and measured can inform how they could be improved and leveraged for climate resilience. So far, the goals of reporting appear to have been functionally focused on the bond's accountability—ensuring that it satisfies specified principles—rather than on its impact. These functional criteria have been crucial for maintaining credibility and visibility, ensuring green bonds are, in fact, green. However, improving what is tracked and measured could additionally contribute to ensuring harmony in broader climate resilience outcomes.

Improving what is tracked and measured could additionally contribute to ensuring harmony in broader climate resilience outcomes.

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To track individual green bonds, investors rely on external reviews, verification, and certifications to confirm that their investments are sound and follow accepted principles and standards. A growing body of regional, sectoral, and central bank-issued taxonomies and guidelines provides best practices and voluntary certification for issuers, but the majority of these current processes and guidelines lack a focus on climate resilience. Moreover, as certification is voluntary, only 77 percent of issuers, representing 88 percent of green bond funding, have reported on their use of proceeds, making information collected incomplete.

Measurement relates to the overall bond market rather than individual investments. Most studies on the climate-related outcomes of green bonds have focused on reducing greenhouse gases because it is easier to measure and generalize across projects. Even among these, findings have been mixed. When looking at the impact of green bonds on decarbonization, one study found that the average carbon intensity in the years after bond issuance still varied wildly. This suggests that not only do processes and guidelines need to be adjusted to better reflect the goals of climate resilience, but that more research is needed to understand the benefits of green bonds over time.

Ensuring Investments Generate Resilience

Meaningfully leveraging green bonds for climate resilience could require finding ways to encourage volume as well as value. Some initiatives are beginning to do this. For example, in 2018, the Climate Bond Initiative set out to develop a set of climate resilience principles that emphasize a process of ongoing assessment regarding climate risk management, resilience benefits, and mitigation trade-offs. In addition, the Financial Stability Board formed the Taskforce on Climate-related Financial Disclosures in 2015. Some bond issuers have since taken advantage of these efforts.

These initiatives are encouraging and highlight that green bonds could help achieve greater climate resilience. Long-term success may require a greater awareness and application of climate principles in financing projects; more cooperation across the climate science, policy, and finance communities; and more research to understand whether and how progress is being achieved.

Karishma V. Patel is a doctoral candidate in policy analysis at the Pardee RAND Graduate School and an assistant policy researcher at the nonprofit, nonpartisan RAND Corporation; Michelle E. Miro is an engineer at RAND and a professor of policy analysis at Pardee RAND. This commentary was supported by the John and Carol Cazier Initiative for Energy and Environmental Sustainability.

Commentary gives RAND researchers a platform to convey insights based on their professional expertise and often on their peer-reviewed research and analysis.