Valeria Dagnino Contreras
Latam Officer
Climate Bonds Initiative - CBI
Expert Contributor

Understanding the Labelled Bond Market Through Data

By Valeria Dagnino | Thu, 09/22/2022 - 16:00

Green bond databases have been emerging globally to keep track of labelled debt as the market grows. These are important for decision-makers and market analysts as some of these require further detail than just listing the bonds issued per country or issuer type.

Not all databases are structured the same or keep track of global issuances. Some of these keep track of the bonds issued in a specific country, region, or currency. These serve the purpose of the data provider but what about market analysts, how useful can this data be for them? As there are several green bond databases, what differentiates the Climate Bonds green bond database from the rest?

As Climate Bonds Initiative releases a revised methodology for its green bond database, it is important to understand what this means. The revision seeks to provide greater transparency and clarity on the process of including bonds and distinguishing different database segments.

Originally the databases included green debt instruments where the green definitions were in line with the Climate Bonds Taxonomy. This served as an important reference point for common green definitions in the thematic bond market. The classification system seeks to move the market into a net-zero economy utilizing science-based classifications. Therefore, the database helps promote a more transparent market, so investors really know what they are buying.

The dataset provides different market players with the important information needed to analyze how the green or thematic bond market behaves and identify low-carbon investments. Debt market participants, such as investors, index providers, stock exchanges, asset managers and governments, utilize the database to understand the market.

To be included in the database, labelled debt goes through a revision process called the screening methodology. After being identified as climate-aligned or self-labelled debt, the Climate Bonds’ Markets team screens the eligible projects and assets, and  more specifically, their green credentials to determine if the proceeds will go into financing eligible expenses in line with the green definitions and their thresholds.

It is important to note the Climate Bonds database is the only green bond database that goes into detail about whether the labelled green bonds comply with green definitions. Other databases, although useful, do not go deeper into looking at whether the actual projects and assets to be financed meet any criteria or if these are just self-labelled debt instruments.

Databases as instruments can serve different purposes, including analyzing the market, its growth, what percentage of these bonds have external revisions and into which sectors are most proceeds being directed.

Climate Bonds’ new methodology requires 100 percent of net proceeds to be aligned to the included green assets. Previously, the requirement was 95 percent, which allowed the issuers to use the remaining proceeds to cover issuing costs or other expenses. This change reflects recent market practices of increased transparency to disclose the use of net proceeds, which is the amount received after all costs and expenses are deduced. On the other hand, to assess the green alignment, the EU taxonomy may now be used in complement as a point of reference for sector-specific criteria or, more specifically, for those sectors where the Climate Bonds Initiative is yet to release new criteria. 

Even though most green bond financing has been issued to allocate climate change mitigation solutions, adaptation and resilience measures are also eligible; if the issuer can demonstrate these proceeds are not to undermine emission reduction goals, these bonds may also be included in the database.

Perhaps the most important change to the methodology is the availability to include research and development and other supporting expenditure for physical assets to the use of proceeds if these conform to the eligibility criteria. This change supports our collective ability to address climate change by helping to enable and commercialize new low-carbon technologies. Late stages of R&D spending can be likely to prove immediate to near-term investments in capital assets, which can deliver positive climate benefits.

Finally, as the labelled bond market grows farther from green bonds and more specifically into social and sustainability labelled debt, it has become a necessity for decision-makers and database users to understand how these bonds are behaving. To respond to these changes, Climate Bonds has now launched a Social and Sustainability bond database. These bonds cannot be simply allocated to the green bond database as their proceeds are not within the scope of the Climate Bonds’ green definitions. However, new market instruments, such as ESG or Sustainability use of proceeds bonds, can now be found in their respective databases.

At the end of the day, green or labelled bond databases provide the ability to analyze the market and make decisions based on where proceeds are being directed and what institutions are issuing, taking the opportunity of the market and what conditions they have found. The changes to the methodology or new databases only seek to respond to market behavior.

Learn more about the Climate Bonds Database: