With extreme weather accelerating due to climate change, Latin American sovereigns and the state of California are set to jump-start the nascent resilience bonds market. Boosted by regional heavyweight Brazil making environmental and social resilience a priority of its presidency of the G20 group of countries, the first LatAm deals could emerge this year.
Sustainability-linked bonds tied to resilience measures could follow.
Further momentum comes from new efforts to develop a taxonomy for adaptation and resilience finance. The United Nations Office for Disaster Risk Reduction and NGO Climate Bonds Initiative published a white paper in June titled “Designing a climate resilience classification framework”.
It said that resilience projects accounted for only 7% of US$632bn in annual climate finance in 2021, with almost all flows coming from development finance institutions and the international public sector.
Abhilash Panda, deputy chief of intergovernmental processes, interagency cooperation and partnerships at UNDRR, called for increased investment in disaster risk reduction, terming it “critical”.
“We’re saying that this needs to become big,” said Sean Kidney, chief executive of the CBI. He sees notable opportunities for resilience bonds and possibly SLBs linked to resilience in developing countries “where mitigation is not the biggest problem [but rather] preparing for the impacts of climate change”.
Kidney emphasised that the projects public entities will seek to fund through resilience bonds go beyond direct responses to climate change, saying: “It's not just physical – it's social, it’s economic, it’s health.”
The CBI in September 2019 launched a Climate Resilience Principles framework for assessing resilience investments. The same month, the Coalition for Climate Resilient Investment – which now numbers nearly 60 financial institutions, including Aviva, California State Teachers' Retirement System, DWS and Fidelity, as signatories – was launched “for the effective integration of physical climate risks in investment decision-making”, and the European Bank for Reconstruction and Development issued the first formal “climate resilience bond”.
The US$700m offering’s use of proceeds is aligned with the framework. The supranational said it would finance infrastructure, business and agriculture projects in its €7bn climate resilience portfolio, citing a hydropower upgrade in Tajikistan and a water conservation project in Morocco.
Very few formal resilience bonds have emerged since the 2019 push, however. Japan’s Central Nippon Expressway was a rare exception, issuing US$100m in February following a US$400m offering in November 2020.
The state-owned toll road operator uses proceeds to fund bridge renewal, slope reinforcement and repair and emergency transportation routes.
Japan International Cooperation Agency also picked resilience for its annual themed bond issue earlier this month. Its ¥32bn (US$220m) issue will fund disaster-resilient infrastructure, and provide support for flood preparedness and forest management in developing countries.
New wave
A new wave of issuers is preparing to adopt the label. In anticipation, one major asset manager is already establishing an investment fund that will focus on resilience bonds.
Kidney hopes that a first LatAm sovereign bond will be launched under the label this year, though this is not certain. “We expect to see some sovereigns in the relatively near future,” he said, noting that sub-sovereign resilience bonds may also emerge.
No sovereign from the region has yet confirmed the intention of using the resilience label. Chile and Uruguay, which pioneered sovereign sustainability-linked bonds last year, each told IFR that they have no plans, while Brazil – which is set to offer its inaugural ESG debt imminently – is also known not to be looking at the product despite its G20 campaign.
But a host of other sovereigns, including Colombia, Ecuador, Guatemala, Mexico and Peru, are active in ESG bonds. Paraguay has also said that it hopes to enter the market soon.
Meanwhile, California is preparing to issue as much as US$15.5bn in resilience bonds. If endorsed by voters in March, a Senate bill (SB-867) that has now nearly completed the state legislative process would authorise the offerings.
The bonds would fund projects for drought, flood and water, wildfire and forest, and coastal resilience, as well as extreme heat mitigation, biodiversity and nature-based climate solutions, climate-smart agriculture, park creation and outdoor access, and clean energy.
Pushback?
Not all market participants welcome the prospect of another new ESG debt label.
“I’m not sure that there's much appetite for more – certainly not on the buyside,” said one ESG banker, who expects “a bit of pushback”.
“We probably have all the tools we need in the toolbox for issuers to be able to communicate what they want to do on that agenda," the banker said.
"They can still use the resilience terminology and concept but within the framework of a recognised green or sustainability-linked bond.”
Still, a novel label might help some issuers’ marketing efforts by attracting attention.
“They may well get traction from it, particularly from people who are wondering about the economic impacts of severe adverse weather events on the country's ability to manage its debt pile,” the banker said, adding that the “apparatus” of a new formal label also risks confusing or alienating investors.
The International Capital Market Association, whose chief executive Bryan Pascoe recently called resilience bonds “a positive first step”, has no plans to offer guidance on the product. An ICMA spokesman said that resilience forms part of its Green Bond Principles’ “climate change adaptation” eligible green project category.