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Covered Bonds Backed by Government May Unlock Renewables Cash

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Dec. 14 (Bloomberg) -- Covered bonds, a financing mechanism used primarily for mortgages, are getting promoted to fund clean-energy projects to raise the estimated $1 trillion a year in new private capital needed to keep emissions at safe levels.

Issuing public sector-guaranteed bonds would enable the securities industry to build experience in gauging financial performance for renewable-energy assets without direct exposure to underlying credit risks, according to a report published today from the Climate Bond Initiative, a group advocating new ways to finance clean energy projects.

“Covered bonds have proven to be a reliable source of term-dated funds for banks,” Frank Damerow, an author of the report, said in an e-mailed statement. “Banks would benefit from issuing renewable-energy covered bonds as it would give them access to a wider pool of term-dated funds with which they could increase their lending activities.”

An additional $1 trillion a year of investment in low-carbon transport and buildings as well as renewable energy is needed to reduce greenhouse-gas emissions to a safe level, the report showed, citing the International Energy Agency. About $260 billion was invested in renewable energy last year, London-based Bloomberg New Energy Finance estimates.

Covered bonds, backed by borrowers’ assets and usually carrying lower costs than unsecured bank debt, may provide a platform in the development of a wider bond market for renewable energy, according to the report. They enable banks access to cheaper, longer-term funds to lend to renewable energy projects.

To contact the reporter on this story: Louise Downing in London at ldowning4@bloomberg.net

To contact the editor responsible for this story: Reed Landberg at landberg@bloomberg.net