This paper aims to clarify the role of green bonds in financing adaptation and resilience. Green bonds are often referred to as a potential contributor to filling the adaptation finance gap, specifically in terms of channelling private sector finance to adaptation. Less discussed, however, are the roles they play or could play in financing adaptation to meet those aims. Looking more closely at green bond data can help us to set more realistic expectations for the tool and identify ways to make it more useful for investing in adaptation and resilience.
The paper achieves the following:
- Establishes a baseline for global adaptation needs and sets out private sector involvement in these areas or sectors of need
- Introduces green bonds as a financing tool and explores their capacity as a vehicle for private sector financing of adaptation
- Analyzes the data on green bond issues, and assesses the level of adaptation green bond finance and in which sectors adaptation green bonds are found
- Considers the potential limitations of increasing the capacity for private sector green bonds to fill the adaptation gap
The study finds that green bonds finance adaptation, but only to a very limited extent. The challenges linked to the use of green bonds to invest in adaptation are the same as those presented by other private sector finance tools.
However, these have less to do with green bonds as a mechanism, and more to do with the nature of those investments, the limits of the market and the current level of risk awareness. Efforts should be made to increase the development of projects that are appropriate for green bonds, such as revenue-generating, large-scale or poolable projects and projects that focus on hard adaptation components, but also to complement these with the necessary soft components.
In addition, regions or countries with developed bond markets must act first, which would help regions with nascent or emerging green bond markets to more quickly incorporate adaptation financing into the market than has been the case to date.
Three policy recommendations
The recommendations set out below would promote the inclusion of adaptation in private sector green bond investments.
- Efforts are needed to increase investor and issuer awareness of climate-related risks to businesses in the key sectors in need of adaptation.
- Green bond review processes should systematically highlight adaptation- and resilience-related risks wherever relevant.
- Guidance for the private sector on how to invest in adaptation could increase the inclusion of adaptation- and resilience-type activities in green bond frameworks.