Covered bonds could be used to draw private sector funds to support bank lending to the low-carbon economy and partially de-risk clean tech projects for investors, according to a new white paper.

Spending on clean energy reached $260bn in 2011, but this is still well short of the $1 trillion the International Energy Agency estimates is required if the world is to make a serious impact on the levels of carbon emissions from fossil fuel usage, a report by the Climate Bonds Initiative says.

It adds that declining government subsidies cannot fill the gap and proposes adapting covered bonds for renewable energy finance, tapping into a €2.5 trillion market.

Already well-established in Europe where they have been used in the ship building and aircraft industries, and gaining traction in the US, covered bonds are highly regulated bonds that enjoy superior ratings and lower funding costs than standard bonds.

Moreover, they have a unique recourse structure, governed by legislation in many countries, which gives investors more security by providing a claim over a dedicated “cover pool” of assets that is visible and open to scrutiny by analysts, as well as a general claim against the issuer itself.

The paper acknowledged that regulations would be needed to define what type of assets would be eligible, how they would be managed, and what definitions apply to low-carbon assets, before covered bonds could be adapted to provide low-carbon finance.

But Sean Kidney, chair of the Climate Bonds Initiative, told BusinessGreen that ultimately a simple tweak to legislation that financiers already understand very well could open up the market.

The report argues that once these specific reporting standards have been established, investors could gain experience in how renewable energy assets perform without having to take a direct credit exposure. And in the meantime, guarantees by agencies such as the European Investment Bank could kick-start the Renewable Energy Covered Bonds (RECB) market.

Kidney said the bond markets remained largely untapped for renewable energy finance, but warned this situation had to change if global temperature rises were to be kept below two degrees Celsius, the widely recognised tipping point for runaway climate change.

“Achieving the scale of investment required is not an easy task especially given the urgency required,” he said in a statement.

“However, while bespoke climate covered bonds legislation is being developed, a renewable energy covered bond market could be kick-started with the use of guarantees by agencies such as the European Investment Bank.”