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Water Consortium

Sponsors

Climate Bonds Standard Water Infrastructure Criteria
Frequently Asked Questions (FAQ)
1) What is a bond?
Bonds are a debt instrument or type of loan or IOU that governments, companies and otherentities issue to finance or refinance projects. The issuing entity guarantees to repay the bondover a certain time period, plus either a fixed or variable rate of return to the bond buyer.

2) What is a Green Bond?
Green bonds are a fast-growing type of debt instrument similar in financial structure to a ‘vanilla’bond outlined above. They are an instrument for earmarking private financing to fund projects
that deliver environmental benefits.
Most green bonds are use-of-proceeds bonds, with the issuer committing to investors that allfunds raised will only go to specified projects with positive environmental outcomes.

3) What is a Climate Bond?
Climate Bonds are a subset of green bonds. Use-of-proceeds must be invested in assets
compatible with a low carbon future in which water infrastructure or management projects are
adaptable and resilient to current and future climate change.

4) What is a Water Climate Bond?
This is shorthand for a climate bond where the proceeds are used for assets and projects which
are water infrastructure or water management related and focus on adapting to or mitigatingclimate change.
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Like normal bonds, water climate bonds can be issued by governments, municipalities, multinational banks or corporations.
As an example, water climate bonds can be used for energy or industrial water efficiency projects
reuse, catchment or watershed restoration and/or large-scale water supply infrastructuredevelopment.
Where a bond issuer is seeking to ensure their bond offerings for water-related infrastructure, orwater systems within industrial and manufacturing processes, or maximise sustainability andenvironmental factors, a water climate bond provides a standard for assessment of these factors.

5) What is Certification?
A Climate Bonds Certified water bond is a bond which has been independently verified to see thatthe proceeds have been or will be spent on water infrastructure assets and projects, in compliancewith the terms of the Water Infrastructure Criteria of the Climate Bonds Standard. The ClimateBonds Standard Board will have approved the Certification on that basis.

6) Why is water important in the context of climate change?
The World Economic Forum recently named water as a major global economic risk. Population
growth, increased competition for dwindling supplies, aging infrastructure and water pollution are
key drivers, but climate change will exacerbate all these challenges.
Physical risks from climate change very often manifest as water risks. Drought, floods and otherextreme weather conditions are likely to increase in frequency and severity, putting pressure on
water utilities and infrastructure. Existing systems for water catchment may be insufficient as
precipitation patterns shift from more frequent, predictable rain and snowfall to less frequent,more violent storms.
Water infrastructure that is able to cope with and proactively prepare for more extreme andunpredictable weather patterns is a necessary investment for a sustainable future.
In addition, water infrastructure can offer mitigation potential.
Water distribution systems can use large amounts of energy. Similarly, sewage plants andwastewater generate methane emissions, a highly potent greenhouse gas. As we aim to move to a
low-carbon development trajectory, it is important that all opportunities are taken to minimize
emissions across all sectors, including water.

Climate Bonds Initiative | April 201837) Why do we need to recognize water infrastructure assets as distinct criteria under the Climate
Bonds Standard?
Water bonds are issued all the time for financing water infrastructure and water management
projects, but without climate screening there is no means for ensuring that the funds will go tosustainable, climate-resilient projects.
Furthermore, before third-party standards were developed for green bonds, many investors werehesitant to invest in the market. One major US investor even likened parts of the green bonds
market to the “wild west,” because of the loose definition of what constituted an “environmental”
or “sustainable” project.
Setting a robust standard can allay investor concerns that projects have credible science based
credentials and help build a credible market.
Developing Water Infrastructure Criteria under the Climate Bond Standard was therefore
undertaken to provide investors with a clear signal that their funding was supporting climatecompatible projects.
It will also open opportunities for corporate, municipal and other bond issuers to raise funds forclimate-compatible water-related projects more readily in the future.

8) What kinds of projects and assets are eligible?
All water infrastructure and water management projects and investments are potentially eligible,
if they have taken into account climate mitigation, adaptation and resilience opportunities.
The Criteria includes built (also known as grey) water infrastructure as well as natural (also known
as green or hybrid) water infrastructure.
This includes
1. water-related infrastructure
2. water systems within industrial and manufacturing processes, where maximisingsustainability and environmental factors is part of the design and performance objectives
3. projects that address issues of water quality
4. projects that contribute to the resilience of the surrounding ecosystem or watershed
Specific examples include projects which involve industrial water efficiency, reuse, catchment or
watershed restoration, and large-scale water supply infrastructure development.
As an example, the San Francisco Public Utilities Commission was the first to issue a Climate Bonds
Standard Certified Water Bond. Proceeds from the USD 240 million Waste Water Revenue Bonds

Climate Bonds Initiative | April 2018

4will fund eligible sustainable storm water management and wastewater projects from the utility’sSewer System Improvement Program. More details on this bond is available here.
For full details on which projects are eligible and under which conditions, please see the Water
Infrastructure Full Criteria document available here.

9) How were the Water Infrastructure Criteria under the Climate Bonds Standard created?
The Criteria were drafted through a rigorous science based process undertaken by a Consortium
led by Climate Bonds Initiative in conjunction with the Alliance for Global Water Adaptation,(AGWA) CDP, Ceres and World Resources Institute (WRI).
This process included convening a Technical Working Group (TWG) of global water experts todetermine the scope and nature of the Criteria through a consensus-based collaborative approach.
An Industry Working Group was also convened to advise on the practicality of the Criteria being
developed. A list of members of these groups is available at(https://www.climatebonds.net/standards/about/governance/technical-working-groups).
The Technical Working Group adhered to the Climate Bonds Science Framework, a robust,scientifically grounded analysis on emission mitigation pathways, technology options and impacts.
The Climate Bonds Science Framework is overseen by the CBI Board and implemented by theClimate Bonds Initiative Secretariat and a network of climate research institutions led by thePotsdam Institute for Climate Impact Research.
Following public consultation, the Criteria were submitted to the Climate Bonds Standard Boardfor approval. The Board provides independent oversight over the implementation and operationof the Climate Bonds Standard & Certification Scheme. The Board members comprise a range ofasset owners’ civil representatives and NGOs with approximately US$34tn of assets undermanagement.

10) Why Issue a Climate Bonds Certified Water Bond? Aren’t there additional costs?
All Certified Bonds have some additional transaction cost because issuers must appoint
independent Verifiers to verify that the use of proceeds are compliant with the Water
Infrastructure Criteria of the Climate Bonds Standard, and also comply with overarchingrequirements of the Standard relating to reporting and accounting. In addition, there is a small
administration fee payable to the Climate Bonds Initiative on certification.
However, the many benefits outlined below can offset this cost, especially for repeat Certified
Bond issuers.

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5•

Green bonds generally:o Are in high demand and issuances are generally over-subscribed with associatedtightening of yields;o Are particularly attractive to a growing proportion of investors who are allocating
portions of their portfolios to green investment. This enables issuers to tap into
new pools of funding and diversify their investment base.

•

Climate Bonds Certified Bonds specifically, with their third-party verification of scientificallyrobust criteria:o Increase transparency and comparability for investors, minimizing their transaction
costs in the evaluation of the bond;o Minimize transaction costs for issuers as credible external parties have taken theburden from issuers and verifiers for ensuring that their projects are resilient,climate adaptive, most energy efficient;o Offer the issuer strong green credentials by demonstrating that they’ve done theirdue diligence.

11) Will the Water Infrastructure Criteria be updated over time?
Yes. The Water Infrastructure Criteria will be reviewed annually for at least the first three years forpotential additions and revisions. This is critical because the field of sustainable water
infrastructure is expected to evolve significantly and rapidly in the near future as financemechanisms, financial flows, and policy priorities direct increasing attention to both climate
mitigation and climate adaptation.
New developments and insights regarding best practices for climate resilient sustainable water
infrastructure and projects will be applied to the criteria in subsequent phases.

12) How does the Water Infrastructure Criteria fit within the broader Climate Bonds Standard?
The Climate Bonds Standard and Certification Scheme is a screening tool that enables theidentification of bonds that are positively contributing to a low carbon future, and/ or adaptation
and resilience to climate change.
Only projects and investments that have been independently verified to meet the requirements of
the Climate Bonds Standard can be certified and use the accompanying ‘Climate Bonds Certified’trademark in the market.
The Climate Bonds Standard is made up of two parts:
1. A parent standard setting out the common requirements for reporting and fundsmanagement that all Climate Bonds Certified bonds must meet
Climate Bonds Initiative | April 201862. A suite of sector-specific Criteria, each of which set out what projects or projectcharacteristics in that sector qualify as sufficiently climate compatible. Each one is basedon the best scientific knowledge and is developed by a Technical Working Group, consistingof key experts from academia, international agencies, industry and NGOs.
The Water Infrastructure Criteria are one of many sector-specific Criteria developed under theClimate Bonds Standard. Further information on the parent standard or the suite of sector-specific
Criteria is available at (https://www.climatebonds.net/standard/sector_criteria).

13) How big is the market?
The overall green bond market has grown rapidly since the first issuance less than ten years ago,
reaching USD 41.8 billion globally in 2015. 2016 growth has already surpassed USD $50 billion andis expected to reach between USD $80 -$100 billion by Dec 31st.
Water bonds are an emerging subset of green bonds and are projected to grow with the release of
the Water Infrastructure Criteria of the Climate Bond Standard.

14) Where can I obtain more information?
The Climate Bonds Initiative website has additional information on the Water Standard at:https://www.climatebonds.net/standard/water
Further information on the Climate Bonds Standard and Certification Scheme can be found at:https://www.climatebonds.net/standards
https://www.climatebonds.net/certification
Ceres has extensive water related resources at:https://www.ceres.org/resources/reports/water
The Alliance for Global Water Adaptation, (AGWA) also has information at:
http://alliance4water.org/*********************************
Water ConsortiumSponsors

Climate Bonds Initiative | April 2018