Financing Sustainable Cooling Investments in International Bond Markets1 A Contribution to Operationalizing Energy Efficiency and HFCs Phase-down Synergies2 Research Paper: 5 January 2023 With global warming and climate-driven heat waves becoming more severe, cooling people and goods are a climate adaptation and development imperative. In the next three decades, billions of dollars must be invested in sustainable cooling solutions that do not add more greenhouse gases to the atmosphere. This paper examines how bond markets can contribute by financing these investments. The paper explores different types of "cooling bonds" to raise capital for cooling projects, incentivize performance, manage risks, and leverage donor contributions and carbon markets. Contents Executive Summary ..................................................................................................................... 4 1: Why Financing Cooling Matters .............................................................................................. 6 2: Investing with a Cause – Understand Bond Types for Sustainable Investments .................... 7 3: Cooling Investments and Financing Needs ........................................................................... 10 4: Bond Types and their Application to Sustainable Cooling Investments ............................... 15 4.1: Thematic/Green Bonds – Mobilizing Capital for SCI ...................................................... 15 4.2: SLBs – Linking the Financing Cost to the Sustainability Outcomes ................................ 19 4.3: Structured Bonds that Transfer Investment Risks to Capital Markets ........................... 21 4.4: Leveraging Donor Resources to Issue Bonds.................................................................. 25 4.5: Impact Bonds – Transferring Project Outcome Risk to Bond Investors ......................... 27 4.6: Cooling Bonds to Fund an MLF Cooling Efficiency Facility – A Potential Application .... 31 Conclusions and Next Steps ...................................................................................................... 33 Appendix: Cooling Investment Needs ..................................................................................... 36 Bibliography .............................................................................................................................. 66 1 This paper was produced by a team led by Steen Byskov and Johannes Heister and colleagues of the World Bank Treasury department, namely Eric Alan Abel, Scott Cantor, Naomi Cooney, Fei Wang, and Yibo Zhao. It was supported by inputs on sustainable cooling investments from the Carbon Trust. 2 The authors are grateful for financial support from the Department of Environment, Food and Rural Affairs (DEFRA) of the United Kingdom. Boxes: Box 1: IFC and Tabreed as a Potential Issuers of Cooling Bonds .................................................. 19 Box 3: CO2L Bonds Passing Carbon Emission Reduction Price Risk to Bond Investors ................ 23 Box 4: IFC Forest Bonds Support Projects that Limit Deforestation and Carbon Emissions ........ 23 Box 5: The Pilot Auction Facility Emission Reduction Notes (PAFERN) Structure ........................ 25 Box 6: World Bank bond issued to support UNICEF COVID-19 response ..................................... 26 Box 7: International Finance Facility for Immunization (IFFIm) Bond Issuances .......................... 27 Box 8: World Bank Wildlife Conservation Bond ........................................................................... 29 Box 9: Agromovil ........................................................................................................................... 31 Figures: Figure 1: Green, Social and Sustainability Bonds – Private Investment in Worthy Causes ............ 9 Figure 2: Structured Bond Examples – Passing Development Risks to Bond Investors ................. 9 Figure 3: GSS Bonds and SLB – by Objective and Issuer Type ...................................................... 16 Figure 4: GSS Bonds and SLB – Sector and Credit Rating ............................................................. 18 Figure 5: Development Impact Bond Structure ............................................................................ 28 Figure 6: Cooling Bonds Funding an Energy Efficiency Facility ..................................................... 33 Figure 7: Regional cooling stock projections by 2050 .................................................................. 37 Figure 8: Segmentation of cooling suppliers based on proximity to join the Race to Zero ......... 43 Figure 9: India's projected sector-wide growth in cooling demand ............................................. 47 Figure 10: District cooling procurement mechanism ................................................................... 50 Figure 11: Residential AC cooling capacity in IEA's Baseline Scenario by country/region ........... 52 Figure 12: Commercial AC cooling capacity in IEA’s Baseline Scenario by country/region ......... 53 Figure 13: Schematic overview of food cold chains ..................................................................... 56 Figure 14: Cooling sales: average annual growth rate by sub-sector (2018-2030) ...................... 57 Figure 15: CaaS Financial Structure using a Special Purpose Vehicle ........................................... 62 Figure 16: CaaS Financial Structure using Sale and Leaseback ..................................................... 63 Tabels: Table 1: SCI Types and Their Financing Characteristics ................................................................ 14 Table 2: Examples of Key Performance Indicators (KPIs) for Cooling Bonds ................................ 21 Page 2 Abbreviations: AC Air conditioning CaaS Cooling-as-a-Service CBI Climate Bonds Initiative CER Certified Emission Reduction CO2L bonds CO2-linked bonds (also “cool bonds”) DIB Development impact bonds EIB European Investment Bank EE Energy efficiency ER Emission Reduction ESCO Energy service company ESG Environmental, social, and governance ExCom Executive Committee of the MP MLF GEF Global Environment Facility GHG Greenhouse gas GSS Green, Social and Sustainability HCFC Hydrochlorofluorocarbon KPI Key Performance Indicator ICMA International Capital Market Associations IEA International Energy Agency IFC International Finance Corporation IFFIm International Finance Facility for Immunization LNG Liquified natural gas MDB Multilateral Development Bank MEPS Minimum Energy Performance Standards MP Montreal Protocol MLF Multilateral Fund NCAPs National cooling action plans NDC Nationally Determined Contribution PAF Pilot Auction Facility PAFERN Pilot Auction Facility Emission Reduction Notes PPP Public-Private Partnership REDD Reducing Emissions from Deforestation and Forest Degradation SCI Sustainable cooling investments SLB Sustainability-Linked Bond SLBP Sustainability-Linked Bond Principles SPT Sustainability performance targets UNICEF United Nations Children's Fund WCB Wildlife Conservation Bond Page 3 Executive Summary Cooling is critical for our health and prosperity, and the demand for cooling is growing as the global middle class expands and the planet is warming. Therefore, environmentally sustainable cooling solutions are increasingly needed. The necessary investments will be undertaken by a mix of governments, national and local, corporations, large and small, and households, which calls for a wide range of financing solutions. Global capital markets have the resources to finance the investments, and this paper explores how bond solutions can support a variety of sustainable cooling solutions. Not every sustainable cooling investment is a good fit for bond financing, and ultimately it is the users that will pay for cooling but understanding different bond solutions can help identify when it is useful to bring in bond investors. The rapidly growing investor base looking for green investment opportunities could be tapped for cooling investments that meet investor criteria. In little more than a decade, the green bond market has grown to $1.8 trillion. Not every cooling investment is sustainable, and both cooling solutions and investor criteria are evolving, but there are clearly existing solutions that could be considered for green bonds. Cooling bonds as a class is too specific to be likely to emerge as its own asset class, but they can benefit from tapping into the green investor universe while using their bond reporting frameworks to highlight sustainable cooling solutions. A variety of structured bond solutions have been used to let bond investors participate in risks associated with development projects, and these should be explored for sustainable cooling investments. Structured bonds tend to be specifically designed for the projects they are supporting. Several variants of structured bonds help illustrate how sustainable cooling projects may benefit from both the financing from global capital markets and their ability to absorb cooling investment risks. A selection of these is presented in this paper. Sustainable cooling projects with verifiable metrics could consider Sustainability-Linked Bonds (SLBs) both to finance their activities and to demonstrate their commitment to sustainability outcomes. With $240 billion issued, the SLB market remains small but growing. SLB issuers may pay a lower coupon if they meet targets or a higher coupon if they fail to meet sustainability targets defined in the bonds. Thus, issuers can use SLBs to demonstrate their commitment to sustainability. For example, a corporation providing cooling services, which is in the transition towards more sustainable technology, could use SLBs to demonstrate to investors their confidence in meeting the targets. Structured bonds could also be considered to pass cooling project risks to capital markets, as demonstrated by innovative bond structures that transfer emission reduction risk to bond investors. The financial viability of sustainable cooling investments is subject to risks like future energy costs or the benefit from tradable emission reductions. Bonds embedding emission reduction price risk have demonstrated the capital markets’ ability to absorb such risk . For Page 4 example, the World Bank-issued CO2-linked (CO2L or Cool) bonds transferred emission reduction risk price and volume risk from developing country clients to bond investors. Sustainable cooling projects that are paid on a performance basis can consider development impact bonds to share the performance risk with bond investors while simultaneously financing their operations. Impact bonds were introduced in the UK in 2010 to leverage the risk- taking capacity of the private sector for social impact, and several hundred impact bonds have since been issued. Development impact bonds offer both a financing and a risk-sharing mechanism and should be considered for sustainable cooling projects financed by a third party on a performance basis. MDBs can support sustainable cooling investment projects with the issuance of bonds and by using bond markets to leverage donor resources. The World Bank has issued, for example, a development impact bond for wildlife conservation, a CO2L Bond for emission reduction risk in development projects, and a bond to mobilize resources for UNICEF, and the IFC has issued a Forest Bond to preserve forests. MDBs offer a powerful combination of client advice with the ability to transact in global capital markets while mobilizing private sector financing and risk- taking capacity. This paper illustrates how innovative financial solutions can be leveraged for sustainable cooling investments. It also explores a carbon market-linked bond that would help establish and fund a cooling efficiency facility, which the MLF would operate in the execution of its mandate to maintain and enhance energy efficiency while phasing down HFCs. Page 5 1: Why Financing Cooling Matters Cooling is critical for health, prosperity, and the environment. It keeps our vaccines safe and food fresh, ensures we have comfortable buildings to live and work in and is central to our industrial and transport infrastructure. The summer of 2022 has again seen heat waves sweeping the northern hemisphere, with temperatures in London reaching 40o C; and New Delhi reaching 46o C already in April. Increasingly severe global warming is already testing human productivity and survivability limits and boosting demand for cooling and for electricity to power air conditioning and refrigeration equipment. Cooling is typically energy intensive and highly polluting due to the emissions from the electricity that powers this equipment (generated mostly from carbon-intensive sources) and the refrigerants and insulation foam gas used in it. Cooling is responsible for at least 7% of global greenhouse gas (GHG) emissions today – more than maritime and aviation transport emissions combined.3 Estimates project this to double by 2030 if cooling is delivered in a business-as-usual fashion.4 Emissions growth is largely driven by rising temperatures, urbanization, population growth, and the demands of a growing middle class. The Paris Agreement on climate change of 2015 and the Kigali Amendment to the Montreal Protocol limit global GHG emissions, including from cooling. The Paris Agreement’s target warming limit of 1.5o C above pre-industrial levels requires that GHG emissions reach net-zero by 2050. And the Kigali Amendment charts a phase-down path for highly GHG-intensive HFC refrigerants. But increasing demand for cooling creates a vicious circle, which makes these goals ever harder to reach, although options exist. The World Bank’s 2021 report “The Cold Road to Paris: Mapping Pathways Toward Sustainable Cooling for Resilient People and Economies by 2050” presents cooling as a critical part of future infrastructure and describes strategies across cooling technologies and sectors to create the cooling systems that will be needed. Billions of dollars will be needed to achieve this cooling transformation. Much of this investment can come from private sources since most cooling is profitable: Energy efficiency opportunities are large with short payback periods; productivity gains are significant from reduced food losses in refrigeration and cold chains to greater factory outputs to improved learning outcomes in schools, and human comfort is a benefit that people are willing to pay for. But public funds will also be needed to create the right conditions for the future cooling economy. Governments may have to invest in public cooling infrastructure, such as the vaccine cold chain, and to implement national cooling action plans (NCAPs), which several countries (e.g., India) have already published. Public funds may be required to address regulatory, technological, and financial barriers such as high upfront costs, and promote a systems transitions, for instance by supporting the demonstration of innovative cooling solutions. 3 Parliamentary Office of Science and Technology (UK): Sustainable Cooling – link here. 4 The Race is on, but Cooling industry needs to accelerate net zero efforts - Cool Coalition. Page 6 International capital markets may provide an avenue to finance sustainable cooling investments (SCIs), absorb risks associated with cooling investments, and raise awareness about sustainable cooling. The primary purpose of tapping international capital markets will be to mobilize resources that can finance SCIs with expectations of financial returns, in the same way as other private and public investments are often financed. However, there may also be opportunities to pass cooling-related risks to capital markets. Risks in cooling originate, for example, from technological and policy uncertainties, hard to anticipate climate change impacts, and the future price of energy or the future price of tradable Emission Reductions (ERs). In addition, bonds financing SCIs or managing cooling risks can help raise awareness among bond investors and the public about climate heat impacts and sustainable cooling needs. Not all cooling solutions and investments available in the market today will qualify as “green” and sustainable. Defining the right criteria for sustainable cooling is, therefore, critical. There is a significant risk today that off-the-shelf technologies will be driven by short-term considerations and will lock in the “wrong solutions.” Cooling manufacturers have not sufficiently invested in more efficient and alternative cooling technologies, which tend to be more complex and more expensive. At the same time, affordability pushes consumers to buy, e.g., cheaper but less efficient air conditioners, which have a possible lifetime of some 30 years. More efficient systems, such as district cooling, require more planning and can be riskier for investors, for whom future energy costs may matter little. Uninsulated buildings and badly designed cities are heat traps that require more (potentially unsustainable) cooling. But not all cooling technology is high-tech. Simple solutions such as building design, reflective surfaces, green roofs, and more trees in cities can all contribute significantly, including by taking pressure off unbalanced electricity demand. And better organized, efficient cold chains will not only reduce GHG emissions but also improve health care, provide better access to nutritious food, and improve farmers' incomes. Access to cooling and resilience to climate change are thus also important social criteria. The paper is organized as follows. Section 2 lays out different types of bonds that can be used to pursue societal objectives like the environment and sustainable development. Section 3 discusses the future cooling-related investment needs, who will have to make the investments, how to measure results and outcomes, as well as risks associated with the investments that could be passed to bond investors. Section 4 describes how the different bond types could be applied to different cooling challenges using examples. Section 5 concludes. 2: Investing with a Cause – Understand Bond Types for Sustainable Investments Bond investors increasingly seek investment opportunities that support environmental protection, social impact, or other worthy causes, such as sustainable cooling investments. Investing in green bonds to finance environmentally sustainable activities has led the way, but other themes have emerged. Objectives include, for example, the UN Sustainable Development Goals, the empowerment of women, good governance, and clean oceans. Many green bonds are now governed by voluntary Green Bond Principles, developed by the International Capital Market Page 7 Association (ICMA). Sustainable cooling solutions can be considered in this broader scope of green activities. Green bonds have been the most prominent within a broader class of Green, Social and, Sustainability (GSS) bonds. (Figure 1). Until 2012, the green bond market was dominated by issuers like the World Bank and the European Investment Bank (EIB), who already had programs in place to finance climate action. Since 2013, green bond issuers have included a variety of corporates, such as Apple and Toyota, banks such as Bank of America and Deutsche Bank, US states such as Massachusetts, and several sovereign issuers. In 2016, Poland became the first country to issue a green bond. A few months later, France issued the largest ever green bond, a €7 billion benchmark bond with a 22-year maturity. In October 2017, Fiji became the first emerging market issuer of a green bond. Germany issued its first green bond in September 2020, introducing a new concept aimed at bringing transparency to the pricing of green bonds in the market. Since then, other issuers, such as Belgium, Colombia, Egypt, Indonesia, Kenya, Jordan, Morocco, The Netherlands, Spain, Sweden, and the United Kingdom, have also issued green bonds. Social bonds were developed using the same approach to raise funds for new and existing projects with positive social outcomes. To qualify as a social bond, the proceeds must finance or refinance social projects or activities that achieve positive social outcomes and/or address a social issue (such as health, gender, poverty, etc.). Like it had done for green bonds, the ICMA developed the Social Bond Principles to improve disclosure and transparency in the market. Social and environmental projects are often interrelated, and sustainability bonds were developed to finance or refinance a combination of both green and social projects. These are often issued by organizations financing a mix of green and social projects, such as governments, corporates, or multilateral development banks (e.g., the World Bank is the largest issuer of Sustainability Bonds). Several other labels, such as ESG bonds, SDG bonds, gender bonds, and blue bonds, have been used to highlight the attractive nature of the investments. GSS bonds have the same terms, credit, and financial risks as other bonds raise awareness for activities within the theme. What separates a GSS bond from a conventional bond is the use of proceeds and an impact reporting pledge, showing that the issuer intends to use an equivalent amount of the funds raised for a specified purpose and commits to reporting back to investors. Page 8 Figure 1: Green, Social and Sustainability (GSS) Bonds – Private Investment in Worthy Causes Structured bonds allow issuers to share development impact risks or other risks with bond investors. For investors, structured bonds can provide an opportunity to gain direct exposure to the underlying impacts the investor cares about while earning a return. For bond issuers or project sponsors, the risk of investing in sustainable development activities can be reduced by passing risks to bond investors. These bonds are often very customized and occupy a narrower market segment than the GSS bond market. Figure 2: Structured Bond Examples – Passing Development Risks to Bond Investors Page 9 Structured Bonds are typically designed to serve specific purposes. Notable examples include: 1. Sustainability-Linked Bonds (SLBs, Section 4.2): The investors receive an increased interest rate if pre-defined results are not met or they receive less if the investment was successful. It may seem counterintuitive that investors financially benefit from poor sustainability results. However, the SLB serves as a commitment device for the issuers, who suffer a financial cost if sustainability objectives are not met. 2. Development Impact Bonds (Section 4.5): The investors assume the risk of development outcomes associated with a specific development project. The projects and their funders benefit from the risk sharing because, if intended outcomes are not achieved, the cost of funding the project is lower. 3. CO2 Emission Bonds (Section 4.3): Carbon markets initiated by the Kyoto Treaty have provided the foundation for managing the risk of future delivery or pricing of emission reduction certificates. These transactions let the bond issuer pass emission price and/or delivery risk to bond investors. 4. Donation or future revenue-backed bonds (Section 4.4): Development-oriented entities generally rely on ongoing income and sometimes debt repayments to finance future activities. Such revenues can form the basis of structured bonds where investors share the risk of future revenues. These are merely examples of how structured bonds can transfer development risks and illustrate how development challenges can be addressed. Structured bonds can be designed for other specific development challenges. Practical examples of each of these bond types are elaborated in Section 4. 3: Sustainable Cooling Investments (SCIs) and Financing Needs SCIs span a wide range of activities and investing entities and embed a wide variety of risks that could potentially be financed with either GSS bonds or structured bonds. Identifying these opportunities and the appropriate financing instrument requires some anticipation of SCIs, which is explored in this Section. Hundreds of billions will be needed to finance SCIs in future years. Estimates suggest that 4.8 billion new units of cooling equipment will be sold globally between 2019 and 2030, which would mean the total market value could reach $170 billion in 2030, up from $135 billion in 2018.5 Currently, the United States, China, Japan, and the European Union are the largest consumers of cooling. Emerging economies that have rapidly expanding middle classes and are located in warmer climates are expected to see a sharp increase in cooling consumption. India, Indonesia, and China are estimated to have the highest future growth in cooling sales6. The refrigerant gas 5 Economist Intelligence Unit (2019): The Cooling Imperative – link here. 6 EIU. Page 10 market size is estimated to be $21.3 billion in 2020 and is projected to grow, on average, 7.7 percent annually in the near term.7 The nature of SCIs is hard to predict, but several types of SCIs can be identified to illustrate what to expect. Cooling investments encompass a broad range of technologies and applications. Research for this paper has identified six types of SCIs that are expected to have significant potential in terms of climate change, economic and sustainable development impact. The following six SCIs have been selected to represent a diverse range of possible SCIs. They are used here as examples to illustrate the investments that cooling bonds could help finance. A more detailed assessment of these SCI types is contained in the annex. Manufacturing of Cooling Equipment Much more efficient, low GHG and sustainable cooling systems, products and equipment are needed to meet the goals of the Paris Agreement and the Kigali Amendment to the MP. These systems are being manufactured by several large multinational corporations and many smaller national manufacturers that often assembly different kinds of air conditioners, refrigerators, fans, and other cooling equipment. Manufacturers also produce foams and other insolation materials to control temperatures. Many of their products still use high GHG refrigerants (e.g., hydrochlorofluorocarbon, HCFCs) and do not meet the energy efficiency standards that are already achievable with today's technology. Of the more advanced multinationals, fourteen manufacturers have signed up for the Race to Zero8 and aim to halve their GHG emissions by 2030 and meet a net zero target by 2050. They need to address the GHG emissions from their products throughout their useful life. These companies and many of the smaller manufacturers will have to invest more in research and development and retool their manufacturing lines. One example is Electrolux, a multinational home appliance manufacturer that sells cooling appliances (ACs, refrigerators, freezers), among other products. In March 2019, the company established its first Green Bond framework aligned with the Green Bond Principles (see Section 4.1). Electrolux issued a SEK 1 billion (~USD 100 million) 5-year green bond to finance and refinance eligible investments. Electrolux's eligible green assets amounted to SEK 2.4bn by the end of 2021. Government Investments in Cooling Infrastructure The SCI needs of governments, national or local, typically relate to their buildings and cold chain infrastructure but may also encompass the interlinkages between cooling and energy generation and consumption. Recognizing the need for more cooling and the importance of 7Markets and Markets: Refrigerants Market Global Forecast to 2025, compound annual growth rate – link here. 8 Race to Zero is a UNFCCC-backed campaign to rally non-state actors to achieve zero emissions (see unfccc.int). Cooling manufacturing companies include Advansor, Arçelik, Danfoss, Electrolux, GEA, Godrej & Boyce, Hitachi, Johnson Controls, LG Electronics, Orbia Advanced Corporation, Panasonic, Philips, Schneider Electric, Trane Technologies. Page 11 cooling in reducing GHG emissions, several developing countries have adopted National Cooling Action Plans (NCAPs). 9 These plans lay out steps to better support the cooling sectors and aim to deliver more cooling services in the least harmful way. The India Cooling Action Plan, for example, includes chapters on space cooling in buildings, cold chain and refrigeration, transport air conditioning, and refrigerants. Increasingly, governments and municipalities see cooling and heat resilience facilities as a part of national infrastructure to maintain productivity and healthy living conditions and to meet their climate change commitments. District Cooling Systems District cooling delivers centralized cooling services across several user types, including commercial, residential, and industrial. District cooling may be pursued by dedicated developers, building developers, industrial users, and specialized users like hospitals and municipalities. District cooling systems are more energy efficient than traditional air-conditioning systems and save up to 50 percent or even more if a free resource such as cold lake water is used. The projects are typically large-scale and a good candidate for capital market financing. Residential Real Estate Real estate development accounts for a substantial part of SCI, but SCI is typically ancillary to the main investment. The International Energy Agency (IEA) estimates that the total space cooling capacity for residential buildings will triple, and commercial air conditioning (AC) will at least double.10 Real estate developers in China and India are the largest drivers of residential demand for AC equipment and its operation. Reducing energy consumption not only reduces GHG emissions but also curbs the strain on power grids as AC tends to operate during peak energy usage times. Two specific business models for real estate focus on energy savings: Energy service company (ESCO) and the more specific Cooling-as-a-Service (CaaS) business model. In both, developers and service providers engage in a long-term agreement to invest in and manage energy savings solutions that match all or a significant part of the lifetime of the equipment. These business models concentrate the SCI needs in separate companies, which must finance a large volume of their business investments and assets. 9 The Clean Cooling Collaborative (formerly the Kigali Cooling Efficiency Program) supported 20 countries to develop their NCAPs. India, China, Trinidad and Tobago, Rwanda, Kenya, Panama, Lebanon, Cuba, and Grenada have all published their NCAPs. 52 regions and 1,122 cities are members of the Race to Zero, which commits them to meet net zero by 2050 and halving their emissions by 2030. Source: Climate Champions: The Race to Zero – Who’s in? Link here. 10 For existing and new buildings, IEA The Future of Cooling. Page 12 Food Cold Chains Sustainable food and medical cold chain systems deliver environmentally friendly cold storage and refrigerated transport services, which are used to maintain the quality of food and vaccines as they make their way through the supply chain. Some large global logistics chains operate in this market segment. And in many countries, such as India, cold storage and transport are seen as a priority for food security and safety and to support agricultural development and fisheries. Related cooling investments are made in cold storage facilities and logistics, food processing plants, and related agricultural facilities, and in the recent past, in cold chains for COVID vaccines. Much of the future growth in demand for both volume and quality of food will be in emerging and developing economies. Data Centers Data centers are expected to continue rapid growth, and they use large amounts of energy and require significant cooling. Examples include independent data center developers and companies providing digital services (Google, Meta, Amazon) and large infrastructure (telecommunications companies) which process large amounts of data. Cooling can account for up to 40 percent of energy usage. Data centers that aim to improve energy efficiency are exploring the use of naturally cold geographic locations, the sea, or cold temperatures released from liquified natural gas (LNG) regasification plants to reduce their energy and GHG footprint. The cooling demand for data centers and other industrial applications is expected to grow rapidly. A key risk faced by data center operators is the availability of the service and ensuring a high degree of reliability. Faced with a choice, data center owners may perceive using innovative, less tested sustainable cooling technology as a higher and avoidable risk. Common Characteristics of Large Cooling Investments The six types of SCIs can be characterized based on several factors that may influence how they may be financed. These factors include: 1. The prominence of SCI in total investment. If SCI forms a small part of the total investment, they are unlikely to shape how the investment is financed. For example, project-specific financing for cold chain development, district cooling, or large-scale innovations (such as power plant-scale liquid air energy storage) are cooling-focused investments. Conversely, for most real estate investments, cooling tends to be a small portion of the total project costs. 2. Nature of investing entity, e.g., national or local governments, corporates, SMEs, or households. Different entities use different financing tools, and that influences whether SCI may be a feature in their financing choice. Given the diversity of cooling uses, cooling investments are likely to be needed by all these groups. SCI may initially be driven by governments, corporates (e.g., manufacturers, supply chain, energy sector, real estate), and innovative SMEs developing breakthrough cooling technologies. Page 13 3. Financial viability of SCI. Financially viable SCIs can be pursued commercially by the private sector, whereas other SCIs require government investing, subsidies, or regulation. SCI is often not a direct revenue driver but a cost reduction measure, primarily through energy efficiency. Financially unviable SCIs may be featured in SLBs by governments (Section 4.2), using donor funding (Section 4.4), or various forms of blended financing. Incentives may be needed to drive some SCI. For example, to support the uptake of efficient appliances in developing countries or to develop district cooling, which requires a large upfront investment, but has greater environmental and climate benefits than single cooling units. 4. Fit with green investing taxonomies. International bodies have established taxonomies to define whether a certain investment is green, promotes other social goals, and is for well- governed entities. These taxonomies define whether the SCIs are eligible for various labeled bonds (Section 4.1). Some SCI types would fit within current taxonomies for green investments. However, many taxonomies (e.g., the EU, South Africa, Malaysian, Climate Bonds Initiative (CBI)) are incomplete and continue to evolve. The expectation is that sustainable cooling technology will be included in such taxonomies over time as it is a critical service to many forms of business. When viewed as a component of other categories (e.g., green buildings), cooling is present within taxonomies (e.g., CBI, International Capital Market Associations, ICMA) where it might not be explicitly mentioned. The EU taxonomy covers district cooling, cogeneration of heating/cooling, and power from bioenergy/solar thermal/geothermal/renewable energy. Notably, other services (e.g., hydrogen) produce significant quantities of waste cooling that could be employed to good effect as waste to cooling services. Relevant Key Performance Indicators (KPIs) for SCI. KPIs can be included in certain financing structures. Traditional bond KPIs (Section 4.1) have focused on energy efficiency (e.g., reduction in GHG emissions), but standardized KPIs are yet to be well-established. SLBs also require verifiable KPIs, and donor-funded SCIs (Section 4.2) will typically seek a well-developed results framework with verifiable SCIs. The six types of SCIs identified above are summarized in Table 1. Table 1: SCI Types and Their Financing Characteristics Prominence of SCI Financial viability / Types of SCI Investing entity Fit with green taxonomies in total investment need for subsidy Equipment Material Private enterprises Less sustainable Can fit with taxonomies manufacturing investments may be more profitable Government Small, but individual Government A mix of public goods SCIs impact Nationally investments projects can have (national or local) investments and Determined Contributions large SCI financially viable (NDCs) under the Paris components investments Agreement, and governments could issue bonds against broader objectives than SCI. Page 14 District cooling Dominant Municipal Less sustainable EU green bond taxonomy systems enterprises, private investments may be covers district cooling systems enterprises, Public- more profitable, but Private Partnerships there are viable (PPPs) projects too. Residential real Small, but for ESCOs Private enterprises, Less sustainable Building energy consumption estate and CaaS business PPPs investments may be impacts taxonomy compliance models, they more profitable, but and may allow investments to dominate there are viable be included in taxonomies projects too. Food cold chains Dominant Private enterprises Less sustainable Building energy consumption investments may be impacts taxonomy compliance more profitable, but and may allow investments to there are viable be included in taxonomies. projects too. Refrigerated transportation is also addressed by various taxonomies under both cooling and clean transportation. Data centers Material Private enterprises Less sustainable The EU taxonomy includes investments may be data centers more profitable, but there are viable projects too. 4: Bond Types and their Application to Sustainable Cooling Investments Private capital can be mobilized through bond issuances both to finance SCIs and to transfer SCI-associated risks to capital markets. Whether to use bond financing and how to structure bonds depends on the objectives and features of the SCI project. This Section describes how bonds are being used in practice and discusses how sustainable cooling investments could be supported by cooling bonds. 4.1: GSS Bonds – Mobilizing Capital for SCI The market for GSS bonds is large and growing and provides a potential source of capital to finance sustainable cooling projects. As of the end of 2021, the total thematic bond market was more than $2.5 trillion, of which green bonds were approximately $1.8 trillion.11 The GSS bond market, though just a fraction of the roughly $110 trillion general bond market, has grown tremendously in the past decade. 11 In October 2021, Bloomberg introduced a tagging system with icons for issuers’ bonds that have labels – “green”, “social” or “sustainable” for issuers supporting green and social projects. Page 15 Figure 3: GSS Bonds and SLB – by Objective and Issuer Type Issuance by Theme, Billion USD Issuance by Issuer Type Government Green, Sustainability, 341 agencies, 502 1,800 Financials, 652 Others, 190 Sovereigns, Social, 222 407 Supranationals, 346 Sustainability Corporates, Municipalities, linked, 125 649 103 Sources: Bloomberg and Dealogic. Issuers of green bonds report on impact as set out in their green bond framework, which is guided by principles and taxonomies for green investing. The framework defines criteria used by the issuer to select eligible projects to be financed by the bond proceeds, referred to as the green bond definition, and steps for monitoring and reporting back on the projects to investors. Although according to the published guidelines, it is voluntary, investors generally expect green bond issuers to measure, track, and report on the social and environmental impact of their investments. This level of transparency also creates accountability and lock-in within issuers' own organizations. The issuance of green bonds requires a long-term commitment by the organization to systematic reporting on the positive impacts of the investments and the issuers' overall environmental policies and targets. Transparency on the financing of green activities is encapsulated in the "Green Bond Principles," a voluntary set of guidelines created by market participants collaborating to bring clarity to the market. While the Green Bond Principles have been constructive in defining the green bond process in a standardized way, they do not attempt to define the activities that are considered green. Instead, the Green Bond Principles encourage issuers to transparently disclose their eligibility criteria and provide broad illustrative categories. The Green Bond Principles are a voluntary set of standards that encourage issuers to offer investors a second opinion and to provide an independent assessment of the issuer's framework and activities as a source of information for investors. Various taxonomies have been developed to ensure consistency in approach across green bond issuers. For example, the EU has established the EU taxonomy, and the Climate Bonds Initiative has issued the Climate Bonds Taxonomy. Page 16 Cooling investments that are green, meet social objectives, or both can tap into the growing pool of private investors seeking green and social investment opportunities. To be eligible for green bonds under the Green Bond Principles, projects must incorporate environmental characteristics and present defined categories such as renewable energy, energy efficiency, pollution prevention and control, clean transportation, circular economy-adapted products, production, technologies and processes, and green buildings. Different aspects of the clean cooling value chain are present across many sectors and would qualify without needing a cooling- specific methodology. The proceeds of Social Bonds could also be used to finance SCI where elements of the clean cooling value chain clearly connect to social sectors, for example, investments in affordable cooling infrastructure, greater resilience to urban heat stress, access to cooling services for underserved populations, or improved housing, food security, and sustainable food systems. Finally, Sustainability Bonds simply marry the two, Green and Social, to include projects that incorporate environmental and social objectives simultaneously. Many clean cooling investments likely already connect environmental and social objectives and could be included by a bond issuer who wants to finance these investments with a Sustainability Bond. GSS bonds are mostly issued by highly rated companies, countries, municipalities, and multilateral agencies, who wish to connect investors to their efforts in serving environmental, social, and sustainability purposes, but lower-rated issuers still have access. Future SCIs may span a similarly broad range of issuer types. Although the GSS bond market is dominated by investment grade-rated issuers, about $350 billion in GSS bonds have been issued by emerging market entities. This suggests there is an appetite for emerging market GSS bonds that are not necessarily investment grade. Page 17 Figure 4: GSS Bonds and SLB – Sector and Credit Rating Corporate Issuance by Sector, Billion USD GSS Bonds by Credit Rating 500 Investment grade Materials, Industrials, 400 Non-investment grade 48 85 Billion USD 300 200 100 0 Energy, Consumer goods AAA BBB A B Not rated AA BB 41 including discretionary and staples, 112 Source: Bloomberg. The cost of GSS bond financing is similar to that of regular bonds. GSS bonds benefit from additional demand from investors dedicated to such assets, but they do not generally offer issuers a price benefit. The pricing benefit from issuing green bonds (as opposed to regular bonds) has been termed the “greenium”, and researchers have explored its magnitude. The market is still evolving and could change but estimates so far suggest that any greenium has been small12 when it exists at all. In addition, the bond issuer carries some reporting and validation costs associated with issuing green bonds. The motivation for cooling investors to issue might therefore be to demonstrate and highlight their commitment to sustainability, and sustainable cooling in particular, rather than seeking a financial advantage. The creation of a dedicated Cooling Bond segment with its own criteria distinct from the existing GSS labels would likely be too niche to benefit from investors that have dedicated GSS related investment strategies. The most appropriate strategy may therefore be to use the green bond market to raise awareness for clean cooling investments utilizing the existing frameworks and labels, then add clean cooling as an additional impact. Issuers of green bonds with SCI objectives might therefore prefer to follow existing green bond standards, such as a commitment to annual reporting on the use of proceeds and the investments’ green performance, and include at issuance a list of projects for which bond proceeds would be used. In addition, to justify the 12 See for example Flammer (2021) or Larker and Watts (2020). Page 18 label “cooling bonds,” issuers would add specific information on the clean cooling impacts, on which they would report above and beyond the typical green bond reporting requirements. For an issuer like a Multilateral Development Bank (MDB) with green, climate-friendly, and sustainable impacts as its mission, sustainable cooling could readily be incorporated into existing green bond issuance. The addition of SCI into the green portfolio could help raise awareness for the sector among bond investors. For example, the World Bank already funds all its sustainable development projects through the issuance of Sustainability and Green Bonds – an investment portfolio that includes ongoing SCIs. Highlighting these cooling investments in bond issuance documents and reporting and explaining how they meet environmental and social objectives would make SCI an explicit part of the World Bank’s existing Sustainable Development Bond program. Box 1: IFC and Tabreed as Potential Issuers of Cooling Bonds IFC, the private sector arm of the World Bank, has a history of investments in energy-efficient buildings and infrastructure. In 2019, IFC began to expand this business line into efficient space cooling with a focus on district cooling and temperature-controlled logistics (cold chain). In December 2021, IFC signed its first district cooling investment with Tabreed, the world’s largest listed district cooling utility, committing $25 million in equity to a $100 million joint company to establish a district cooling platform for Asia. The joint company has a mandate to invest up to ca. $400 million over five years in district cooling projects, with a target of 100,000 refrigeration tons in district cooling capacity primarily for commercial and retail real estate across India. Both partners agreed that the joint company would apply investment criteria that follow robust environmental, social, and governance (ESG) requirements and sustainable cooling principles related to refrigerants and cooling energy efficiency. These district cooling investments could thus be a ready basis for issuing green and cooling bonds, which both Tabreed and IFC could issue to mobilize additional capital. IFC already has a suite of sustainable finance products, including green loans, green bonds, and sustainability-linked products, which it can blend flexibly with its traditional instruments (loans, equity) to meet client needs. 4.2: SLBs – Linking the Financing Cost to the Sustainability Outcomes SLBs provide a funding mechanism that highlights an issuer's commitment to sustainability goals and provide the issuer with a financial incentive to achieve them. Sustainability outcomes are measured by verified KPIs (see Section 3), which are used to link the financing cost to the borrower’s sustainability performance. For bond investors, an SLB combines investment in a firm that commits to sustainability objectives with the promise of a higher coupon, which the firm pays if it fails to meet its sustainability goals (or a lower coupon it succeeds) as measured by the Page 19 stated KPIs. SLBs that are structured in this way create a monetary incentive for bond issuers to work towards the promised sustainability goals while compensating bond investors if their investment expectations regarding sustainability outcomes are not met. SLBs may offer some price benefits to issuers that achieve their objectives. SLBs have emerged more recently than the GSS bonds, and the early evidence is still developing. However, Kölbel and Lambillon (2022) suggest there is a pricing benefit. The SLB market is small, with about USD $240 billion issued but growing. The Italian energy group Enel issued the first SLB in 2019, a US$1.7 billion five-year bond, and since then, about 500 SLBs have been issued. SLB issuance volumes have ranged from under US$10 million to over $2 billion issued by Swiss pharma company Novartis. More than two-thirds of SLBs have been issued by European issuers, while developing countries account for about 13 percent, reflecting in part that these countries have less well-developed corporate bond markets. While sovereigns account for almost 40 percent of the global bond market, SLBs were exclusively issued by corporates until Chile became the first sovereign to issue an SLB in March 2022. Chile’s $2 billion SLB linked the bond coupon to the country’s GHG emissions and to the share of non-conventional, renewable energy generation in the national electric system. The KPIs used for SLBs should be clear and simple,13 and Chile's choice of two high-level indicators reflects this. Various KPIs have been used in the SLB market, including GHG emissions, ESG ratings, water and energy consumption, the proportion of renewable energy production, and gender equality measures, such as the percentage of women in management roles. Issuers use KPIs that not only are relevant to the corporation but also to the wider society. ICMA has issued SLB Principles (SLBP)14 , which include five core components: selecting KPIs, calibrating sustainability performance targets (SPTs), bond characteristics, reporting, and verification. Building on the SLBPs, the World Bank has explored the potential for sovereign SLB issuance and has reviewed existing data to identify relevant KPIs.15 It provides a framework for designing sovereign SLBs linked to climate and nature indicators that are adequately robust, clearly interpreted, and credibly ambitious. Sustainable cooling may be too specific an objective for a sovereign SLB, but corporates could contemplate using cooling-related KPIs when sustainable cooling is central to their sustainability objectives. Sustainable cooling investments contribute to lower GHG emissions and are thus likely already part of a broader objective articulated in the KPIs of a sovereign’s SLB. But a highly rated corporate issuer producing sustainable cooling solutions could issue an SLB to highlight its commitment to high energy efficiency and low GHG emissions or other goals such as affordable access to cooling. For example, the winners of the Global Cooling Prize could issue SLBs with KPIs that reflect the prize standards which their prototype AC equipment managed to 13 See for example Natixis (2021) for investor perspectives on SLBs. 14 www.icmagroup.org. 15 Flugge et al. (2021). Page 20 meet.16 Table 1a shows examples of KPIs that public and private sector issuers of cooling bonds could consider. Table 2: Examples of Key Performance Indicators (KPIs) for Cooling Bonds KPI Justification Metric Uses Cool roofs Reflective roofs, streets and Percentage of reflective surfaces in Cities that need to finance other surfaces reduce heat in a city area investments to implement a heat cities. action plan Green Trees, water features and other Percentage of green areas, Cities that need to finance spaces natural spaces reduce ambient number of city trees planted and investments to implement a heat temperatures in cities maintained. action plan Energy Efficient cooling equipment uses Percentage of equipment installed Investments in public buildings, efficiency less electric power, resulting in (or sold) that meet MEPS or high energy efficiency subsidy programs. lower indirect GHG emissions energy performance standards Manufacturers investing in technology development. GWP of Traditional refrigerants (HCFCs, Percentage of cooling solutions Investments in public buildings, refrigerants HFCs) are powerful GHGs and that do not use high GWP technology promotion programs. need to be phased out. refrigerants Manufacturers investing in alternative cooling technology R&D Cooling innovation reduces Cooling delivered per unit of Success of public or private sector direct and indirect GHG associated GHG emissions (step investment in cooling R&D emissions change or fleet average) As a special variation of SLBs, donors may provide a performance payment that reduces the issuer’s costs of financing sustainable investment projects. This SLB variant leverages donor funds that provide an incentive for the issuer to achieve sustainable outcomes while mobilizing private capital to finance the investments. Because the donor provides the performance payment, the bond investors’ payoff will be equivalent to that of a GSS bond where there is no financial link between sustainability outcomes and payoff. Meanwhile, this structure allows donors to disburse their funds only when the intended sustainability outcomes are achieved. They do so by paying part of the bond coupon when KPIs are met, which provides the incentive for the issuer to meet its sustainability targets. 4.3: Structured Bonds that Transfer Investment Risks to Capital Markets Structured bonds may be used to help reduce risks embedded in investments in sustainable cooling. For example, future energy savings from an SCI depend on future energy prices. SCI projects may also generate tradable emission reductions (ERs), and the future price of ERs can thus also be a risk factor. Some risks can be hedged using financial instruments available in the capital markets. Although the future price of ERs may not be the most important risk faced by SCIs, it can serve as an example of how capital markets can help manage risks. 16 Two winning teams, one led by Daikin and one by Gree, developed AC prototypes that deliver cooling with over 5-times lower climate impact (refrigerant, energy use) than the baseline equipment while also meeting other prize criteria. www.globalcoolingprize.org. Page 21 SCIs that generate tradable ERs are exposed to the future price of those ERs, and structured bonds can potentially transfer that risk to investors. The Kyoto Protocol introduced a market for Certified Emission Reductions (CERs). Both regulated and voluntary, national and international ER markets have since developed. Regulated markets are predominantly in high-income countries, but emerging markets may benefit from voluntary ER markets. And a new carbon market is emerging under rules set by the Paris Agreement.17 CO2-Linked (or CO2L)18 bonds issued by the World Bank in 2008 embedded CER price risk as well as investment project risk in a structured bond transaction. Predicting the future price of ERs is difficult, and that uncertainty can hold back investments in sustainable projects. In the World Bank’s 2008 issuance, the CER price risk and the production volume of CERs by specific projects were passed to bond investors, making the investment in these underlying projects more attractive. For investors, the CO2L bonds offered the ability to support investment in climate sustainability and to get a return based on carbon prices and the production of ERs by specific projects. The bonds were sold to retail investors, who were likely keen to support the environmental benefits while seeking a return on their investment. 17 World Bank (2022), State and Trends of Carbon Pricing 2022. Ecosystem Marketplace (2021), The State of the Voluntary Carbon Market 2021. 18 "CO2L" and "CO2L Bond" are the registered trademarks of Daiwa Securities SMBC Principal Investments Co. Ltd. The issue was underwritten by Daiwa Securities SMBC Europe Limited, arranged by Daiwa Securities SMBC Co. Ltd., and distributed by Daiwa Securities to Japanese investors. Page 22 Box 2: CO2L Bonds Passing Carbon Emission Reduction Price Risk to Bond Investors Investments that generate carbon credits face both a volume and a price risk. The CO2L bonds, developed in 2008, transferred these risks to bond investors. In doing so, this bond supported the carbon market that was created and operated under Article 12 of the Kyoto Protocol. The CO2L bonds were issued by the World Bank to investors in Japan. The bonds were USD denominated and with full principal protection, so investors knew they would get their initial investment back and only risk the coupon or interest payments. After an initial period with a fixed rate coupon, the coupon payment was linked to the future performance of CER market prices as well as the actual versus estimated delivery of CERs generated by a hydropower plant in the Guizhou Province in China and a bioenergy project in Malaysia. The bond also allowed investors to indirectly support the CER market development. A Forests Bond was issued by the IFC in 2016 to finance forest protection and channel associated carbon credits to bond investors (Box 3). In the scheme, IFC bought the carbon credits from Reducing Emissions from Deforestation and Forest Degradation (REDD) projects that sustain forests. Those carbon credits were embedded in the Forest Bonds sold to investors, who could choose to receive carbon credits instead of regular interest coupons. Investors would thus financially gain from an increase in carbon credit prices. Box 3: IFC Forest Bonds Support Projects that Limit Deforestation and Carbon Emissions The five-year bond was issued in 2016 and raised USD 152 million. Bond investors chose between a cash coupon, a carbon credit coupon, or a combination of the two. This allowed investors, who may need to buy carbon offsets in the future, to hedge the future carbon price. When coupon payment was due, the IFC purchased carbon credits from the REDD project to make payments to investors. Investors could then retire or sell the carbon credits. If investors chose to retire the credits, they would offset corporate GHG emissions by ensuring that the credits' value had been taken out of the buyer's carbon footprint. Furthermore, investors did not take on any project risk and instead faced the IFC, a AAA-rated issuer. Ultimately the bond's Page 23 unique financing structure and involvement with the carbon credit market helped channel funds toward a private sector project creating viable alternatives to deforestation. The bond was intended to be only half its ultimate size but was doubled due to significant investor demand. This was a unique instance of climate finance beyond the more common renewable energy investments that use debt capital markets to channel institutional investor funds toward forest protection. Source: IFC Donor resources can be used to test new market mechanisms for managing risks, as was done with options on CER prices by the World Bank’s Pilot Auction Facility (PAF). As a pilot, the World Bank in 2016 issued structured bonds that mimicked put options that offered investors a minimum price on CERs (Box 5). A subsidy embedded in the scheme ensured sufficient demand, but the market for options in CER prices had not yet developed. Page 24 Box 4: The Pilot Auction Facility Emission Reduction Notes (PAFERN) Structure The PAF provided a minimum price guarantee issued in the form of structured bonds (“PAFERN”), which provide holders the right but not the obligation to sell future ERs at a pre - determined price. The PAF allocated these put options and set the guaranteed price level through an auction, revealing the actual abatement cost of the projects while also ensuring that only the most cost-effective projects received the PAFERNs. Once these options reached maturity, option holders could present eligible carbon credits and redeem their options at the guaranteed minimum price. The ability to choose whether to redeem depending on the market context and their project circumstances was designed to give flexibility to the option holder. n r n n n r ee s n ri e u si y ur ase s i e ri e Market solutions can reduce the financial risk of cooling investments. Risks in SCIs can be related to energy and carbon markets, environmental regulation, and technological development. The success of SCIs may also depend on ambient temperature. With weather patterns becoming more volatile, it will be harder to predict the demand for cooling services provided, e.g., by a district cooling plant. Not all risks are marketable, but governments or donors can explore solutions like the PAFERN, the Forest Bonds, or the CO2L bonds to demonstrate the marketability of risk and thereby stimulate SCIs. 4.4: Leveraging Donor Resources to Issue Bonds Donors often seek to leverage or accelerate the impact of their donations, and financial instruments can be designed to achieve that. Simple solutions include co-financing with other sources, but bond markets can also be used to speed up the results of donor funds, as illustrated by two current examples. Using bond markets to frontload the flow of future donations is particularly attractive in situations where massive investments can reduce future damage and with that the need for aid and even higher donations to manage and alleviate the environmental or social consequences of such damage. Vaccination to prevent the future burden of disease is a clear case in point. But the same can be true for climate disasters, where preparedness for future heatwaves can protect economies and save lives. Page 25 A structured bond issued by the World Bank in 2021 mobilized $50 million of private capital to directly support UNICEF's COVID-19 response around the world (Box 5). Repayment of the bond was linked to future UNICEF donations from private donors. The funds directed to UNICEF accelerated their ability to alleviate the historical challenges faced by children due to the COVID- 19 pandemic and has arguably prevented worse outcomes and greater future poverty. Box 5: World Bank bond issued to support UNICEF COVID-19 response In 2021, the World Bank issued USD 100 million five-year bond under its Capital-at-Risk program. USD 50 million was directed to World Bank sustainable development activities, and another USD 50 million was transferred to UNICEF. UNICEF committed to paying back the funds over a five-year period through semi-annual payments. However, the repayment by UNICEF was conditional on the receipt of sufficient donations in 18 target countries. The risk of UNICEF being unable to raise sufficient funds from donors was passed to investors. Thus, the structure not only mobilized funding from the capital markets but also leveraged the risk-bearing capacity of private investors. Meanwhile, it allowed the World Bank to support UNICEF's financing needs without creating a credit risk exposure to UNICEF. Another example is the International Finance Facility for Immunization (IFFIm), which has raised more than $8 billion in capital markets to accelerate vaccine access in poor countries (Box 6), backed by long-dated and legally binding pledges from 10 sovereign donors.19 IFFIm is itself the issuer of the bonds, but it is supported by the institutional capacity of the World Bank to issue bonds20 in the capital markets since it is operationally demanding for an entity to issue bonds and is, therefore, only a meaningful solution where volumes are sufficiently large. 19 United Kingdom, France, Norway, Italy, The Netherlands, Australia, Sweden, Spain, South Africa, and Brazil. 20 The IFFIm bonds are not structured bonds in contrast to many other bonds discussed here. Page 26 Box 6: International Finance Facility for Immunization (IFFIm) Bond Issuances IFFIm offers an example of leveraging donor resources to secure bond financing with the help of a development bank. IFFIm finances Gavi, the vaccine alliance, which provides access to vaccines for children from poor countries. IFFIm secures funding from donor countries through long-dated and legally binding contracts. Supported by the World Bank's institutional capacity for bond issuance, these donations are used to issue vaccine bonds on international capital markets and thereby give Gavi access to capital from international investors. IFFIm’s credit rating is supported by credit ratings and commitments of its donors, its conservative risk management policies, and the financial management expertise of its Treasury Manager (the World Bank). Proceeds raised from bond issuances are then funneled to Gavi to aid in the procurement and distribution of vaccines. This allows Gavi to accelerate the impact and flexibility of their funding on vaccine distribution. Although a moderate issuer, IFFIm’s singular focus vaccine mandate has a particular appeal to ESG investors, especially those who look to further diversify their ESG portfolio beyond green bonds. Donors committed to funding energy efficiency, sustainable cooling, or heat resilience programs can potentially accelerate their support using cooling bonds. A case in point is the recent rapid roll-out of the COVID-19 vaccine cold chain in many countries. Like both UNICEF’s crisis and IFFIm, the need was urgent. Developing the cold chain and access to cooling in a sustainable manner can prevent lock-in of unnecessary future GHG emissions, e.g., from long- lived energy and GHG intensive cooling technology, poorly designed buildings, and heat island- prone urban design and architecture.21 Sources of climate finance, such as the Green Climate Fund, could leverage their long-term funding and multiply their impact if they helped issue green bonds to finance early-action sustainable cooling investments that protect people and economies from heat waves while also preventing large volumes of future GHG emissions. 4.5: Impact Bonds – Transferring Project Outcome Risk to Bond Investors Impact bonds can transfer project outcome or impact risk in SCIs to bond investors. Impact bonds have been used for a variety of development impact risks and typically have four key parties (Figure 5): 1. A payer (potentially a government or a donor) paying at least partially based on performance 21 Refer for instance the new cities of Egypt or Indonesia’s planned new capital . UNEP, with funding from the MLF, is studying a seawater-based district cooling system for New Alamein City on Egypt’s Mediterranean coast, which would avoid or reduce the use of HFC refrigerants. But there are preliminary indications that Egypt’s New Urban Communities Authority (NUCA) is in favor of adopting conventional cooling solutions given the time pressure to build new cities’ districts. https://www.coolingpost.com/world-news/unep-explores-seawater-air-conditioning-in- egypt/ Page 27 2. A project partner that implements the project and receives performance-based payments 3. Bond investors who provide initial financing and seek returns linked to performance 4. An independent calculation agent who monitors the project and reports on the performance that drives the payments. Project payers can use results-based financing to incentivize the project implementing entity to achieve desired outcomes and to insure themselves against the risk that their funds are spent on unsuccessful projects. The project entity may not have the financial capacity to fully guarantee the outcomes. With an impact bond, bond investors can help fill this gap by assuming an outcome risk that otherwise resides with the project. From the payer’s perspective, this guarantees that they pay for performance. If the project fails, the payer can spend the funds on another project. Impact bonds reinforce an emphasis on outcomes and impact. Figure 5: Development Impact Bond Structure Impact bonds have been used in developed economies for over a decade, and more recently in developing countries labeled as development impact bonds (DIBs). 225 impact bond transactions have been recorded, including 15 DIBS in low- or middle-income countries since the first impact bond in 2010 in the UK.22 The World Bank has been actively engaged in several DIBs in health, education, and jobs, including: the Gaza Finance for Jobs II Project; the Uzbekistan Promoting Early Childhood Development Project, the Ghana Accountability for Learning Outcomes Project, and the Cameroon Kangaroo Mother Care Project. 22 Brookings Impact Bond Snapshot (February 2022). Page 28 The World Bank recently issued a DIB supporting wildlife conservation (Box 7). DIBs have typically been issued to impact investors or philanthropists that do not necessarily require market returns for the risk they assume. However, the World Bank’s Wildlife Conservation Bond (WCB) was issued to private bond investors that seek market returns for their investments, thus demonstrating the ability to mobilize the risk-bearing capacity of private bond investors for sustainability activities, which could potentially be replicated to support sustainable cooling. Box 7: World Bank Wildlife Conservation Bond This 5-year outcome-based World Bank bond mobilized private capital to directly finance conservation activities and transferred project outcome risk from donors to capital market investors. Financing going to the conservation project comes from the bond coupon payments, which investors agree to forgo and which the World Bank instead pays to two designated wildlife parks in South Africa. If the project is successful, investors receive a success payment funded by the Global Environment Facility (GEF) and without success the GEF can allocate those funds to other projects. Project success is measured at bond maturity based on the rhino population growth rate at the parks, calculated, and verified by independent parties. In contrast to the norm in the impact bond market, the bond was principal protected, making it attractive to institutional investors. The principal is not earmarked for the conservation project but instead supports the financing of the World Bank sustainable development program. Impact bonds can improve the effectiveness and efficiency of service delivery by shifting the project implementing entities’ focus from not just specific service delivery but also to the final intended impact and outcomes of such delivery. For instance, a bond-financed program to improve access to cooling for poor populations could make the coupon payment dependent on the number of people reached, poverty level and urgency, e.g., measured by peak temperature Page 29 occurrences. Impact bond transactions can also provide funding upfront or in tranches, thus offering project implementers the needed liquidity to deliver services or finance capital investments. An impact bond structure can result in increased scrutiny on service delivery during project implementation and strengthen the project implementers' emphasis on impact, ultimately leading to a greater chance of success. However, impact bonds also add costs to a project's design and structure, and outcomes need to be independently verified. Thus, impact bonds should be used when the economic benefits of the financing are likely to outweigh the costs. Cold chain logistics is an example for a risky cooling project that can have a large impact and may benefit from risk sharing with impact bond investors. Cold chains can connect, for example, India’s low-income farmers with urban markets and consumers through reliable information and fast, quality-controlled cold chain logistics for the transport of fresh, nutritious, high-value-added produce. Box 9 provides a practical example of such a platform. Building and operating a guaranteed unbroken food cold chain is a technologically and organizationally complex undertaking in which many parts, people, and businesses must come and fit together – from timely harvest to pre-cooling, packaging, cold storage, refrigerated transport – always using climate-friendly technology – to data chain on produce quality, payment systems, and timely delivery to consumers. Modern cold chain logistics can draw on the latest mobile data technology (“Uber of cold chain”). But it is still a risky venture, yet one which can be profitable and deliver high development impacts and which cooling impact bonds could support. Different entities in the food chain could explore bond solutions perhaps in stages as the cold chain develops and grows. Impact bond investors could provide capital for large entities with strong creditworthiness. Impact donors could provide incentive payments in a DIB structure, targeting for instance reduced food loss or improved farmers’ income as impact indicators. The DIB financing structure would, of course, not replace the expertise, local knowledge, and business skills of the project developer. However, it could stimulate timely corrective interventions if needed to keep the project on track and deliver the expected outcomes. Page 30 Box 8: Agromovil Agromovil is a mobile supply chain platform designed to connect farmers with markets and create insights that help companies and co-operatives plan, manage risk, and track impacts, to increase farmers’ income and reduce food loss. Their business-to-business (B2B) app-based service provides a low-cost solution to schedule on-demand transport, access micro-insurance to manage risk, and connect to secure mobile banking. Headquartered in the United States, Agromovil started operating in the US and Colombia and has now expanded to Tanzania, Ghana, and Nigeria. They have mapped 1,000 farms and have 1,500+ users across more than 150 communities. 500 tons of goods have been placed for sale across 80+ varieties of products. Agromovil’s partners and supporters include USDA, USAID, The World Bank, Guinness, Coop, Toyota Mobility, Financiera Comultrasan, and the Ministry of Agriculture Colombia. Source: www.agromovil.co 4.6: Cooling Bonds for an Energy Efficiency Facility – A Potential Application Funding is needed to incentivize energy efficiency (EE) investments and implement the Kigali EE mandate; and cooling bonds may help mobilize the needed resources. When the Parties to the Montreal Protocol (MP) agreed to the Kigali Amendment, they also decided that EE should be maintained and, if possible, enhanced while phasing down HFCs. But to date, no funds to support EE have been made available to the MP’s Multilateral Fund (MLF), which supports HFC phase-down in developing countries. An MLF-associated EE Facility could explore models that leverage future incomes from carbon credit markets to support and accelerate EE investments. A single-source EE Facility operated by the MLF Executive Committee (ExCom) would avoid coordination problems and governance red-tape that can result from blending financing from different sources. Thus, the ExCom could more easily focus on synergies when deciding on funding for projects that phase-down HFCs and enhance EE in tandem. The Facility’s sole purpose would be to support EE enhancements (and thereby reduce indirect GHG emissions) in projects that also receive funding from the MLF to phase down HFCs, using a single process. ExCom would use the EE Facility to provide funding to MLF beneficiaries in exchange for the right to the GHG reductions that result from their EE-enhancing actions. Grant funding for EE would be provided via National Ozone Units along with any MLF funding. In exchange, beneficiaries (for instance manufacturers of air conditioners) would agree to collect data using Page 31 agreed monitoring and verification protocols and transfer the rights to generate and own the resulting carbon credits.23 Carbon credits could provide a source of income for the EE Facility. This would require processing emission reductions, converting them to carbon credits, monetizing them, and administering the proceeds from such transactions. For these support functions, a GHG manager, a carbon broker, and a financial administrator would be employed. Figure 6 depicts these relationships. The GHG manager would claim marketable carbon credits. The manager would independently verify and validate the data and information received from beneficiaries and perform the required calculations using methodologies and processes approved under an agreed carbon crediting regime, either associated with the voluntary carbon market or with the compliance market under Article 6 of the Paris Agreement. The GHG manager would send any claimed credits to a carbon market registry for issuance. The carbon broker would conduct all carbon market transactions. The broker would handle the accounting of the carbon credits, communicate with carbon market registries, monetize carbon credits through sales, transfer transacted credits to buyers, or send them to retirement. The broker would execute his duties following instructions, particularly regarding the sale of carbon credits. The carbon broker would forward all financial proceeds to a trust fund. The financial administrator would handle all financial operations through a special purpose Trust Fund (TF). The administrator would manage the TF, which would receive contributions and income from various sources, including from the sale of carbon credits. The TF would hold its assets in trust for the benefit of the EE Facility.24 The TF could be assigned the ownership rights to the carbon credits generated with the help of the EE Facility. The financial administrator would instruct the carbon broker to sell and/or retire carbon credits in line with the needs of the TF and the EE Facility. The TF would be exposed to carbon credit market risks. These risks can be project, regulatory or political risks, which can impact the volume of available carbon credits and/or the market price and thus the available proceeds from credit sales. The TF can mitigate the impact of this risk by raising contributions from donors (governments, philanthropic organizations) or from climate finance facilities or funds such as the Green Climate Fund, which typically have a mandate to invest in (risky) emission reduction projects and may be able to count any progress in reducing GHG emissions towards meeting their objective. Carbon credit risks, in particular project and volume risks, can be managed through a diversified project portfolio with a rich GHG reduction potential . The ExCom’s project portfolio 23 Depending on the legal framework, as part of the purchase, equipment buyers may have to give up any rights they may have to the same emission reductions. 24 A similar trust fund arrangement supports the Global Environmental Facility (GEF). Page 32 is typically diverse spanning many countries and several sectors. And the energy savings and associated GHG reductions are large in many cooling applications, which is evidenced by short investment payback periods. It can thus be expected that the GHG reduction potential from EE investments in cooling applications is large. With fossil fuels still the dominant source of energy in many countries and carbon prices on the rise, it is likely that the value of the generated carbon credits will exceed the TF’s income requirements, potentially leaving a large part of the credits available for retirement. Carbon market risks can be transferred to bond investors. Cooling bonds can be structured to link the value of the coupon to the prices paid in carbon markets, or to the performance of a portfolio of projects, or to the level of energy prices. Section 4.3 shows how this can be done. Figure 6: Cooling Bonds Funding an Energy Efficiency Facility In sum, cooling bonds can help scale up investments in projects with EE and HFC phase down synergies by leveraging carbon markets. Initially, direct donor contributions would be welcome Page 33 as they would enhance the TF’s asset base and financial strength. With greater confidence in the TF’s credit worthiness, the TF could seek bond market financing. While many details would still have to be considered, bond markets present a variety of solutions to fund the EE Facility, which can be adapted to meet the needs of the Facility and the financial strength of the TF that would serves it. Conclusions and Next Steps In the next three decades, billions of dollars must be invested in sustainable cooling solutions that do not add more greenhouse gases to the atmosphere. Governments, national and local, corporations, large and small, and households will look for financing. Sustainable cooling solutions can be financed by tapping into the large and growing green bond market. The green bond market is growing quickly, and it is not necessary to develop specific instruments to mobilize finance from bond investors and promote the specific cause of sustainable cooling. Instead, sufficiently green cooling solutions can be placed within the existing taxonomies (GHG mitigation, energy efficiency etc.) and reporting frameworks of GSS bonds. Structured bond solutions can be a source of financing for SCI and can also mobilize bond investors to participate in SCI related risks. Examples include SLBs that demonstrate commitment to sustainability outcomes, and bonds that transfer emission reduction or other sustainable cooling risks to bond investors. MDBs can support the financing of SCI not only through their lending, but also in developing bond solutions that address specific needs. The World Bank has issued a development impact bond for wildlife conservation, a CO2L Bond for emission reduction risk in development projects, and a bond to mobilize resources for UNICEF, and the IFC has issued a Forest Bond to preserve forests. MDBs offer a powerful combination of client advice with the ability to transact in global capital markets while mobilizing private sector financing and risk-taking capacity. As an illustrative example, the MLF’s e u ive C mmi ee could consider bond solutions for its EE investments. An EE Facility operated by the Executive Committee could help scale up EE while phasing down HFCs using income from the sales of emission reductions to the carbon credit market. Cooling bond solutions could be structured to manage carbon market price or volume risks as discussed in Section 4.3. Moreover, a financially strong EE Facility could consider bond market financing. Specific cooling financing challenges will require bespoke solutions, and future work can explore cooling bonds that address both financing needs and risk sharing with bond investors. The variety of examples presented above demonstrate the ability of MDBs to tailor solutions that combine development financing needs, government or donor objectives, and capital market expertise to devise financing solutions. These solutions provide funding, they transfer risk, and Page 34 they often also pilot new approaches that demonstrate how capital markets can support development financing needs like sustainable cooling. Page 35 Appendix: Cooling Investment Needs An overview of investment needs across six key archetypes Prepared by Carbon Trust 1 June 2022 The report in this Annex was developed by Carbon Trust as background information for the above paper on the use of bond markets to finance sustainable cooling investments. The report is included here for information, documentation and further research. 1. Introduction Cooling is critical for health, prosperity and the environment. It keeps our vaccines safe, food fresh, ensures we have comfortable buildings to live and work in, and is central to our industrial and transport infrastructure. However, cooling is typically energy intensive and highly polluting due to the emissions from the electricity that powers this equipment (generated mostly from carbon intensive sources) and the refrigerants and insulation foam gas used in it (especially if not properly recovered and recycled). Cooling is responsible for at least 7% of global greenhouse gas (GHG) emissions today – more than maritime and aviation transport emissions combined.25 Estimates project this to double by 2030 if cooling is delivered in a business-as-usual fashion.26 Emissions growth is largely driven by rising temperatures, urbanisation, population growth, and the demands of a growing middle class. Estimates suggest 4.8 billion new units of cooling equipment will be sold globally between 2019 and 2030, which would mean total market value could reach $170 billion in 2030, up from $135 billion in 2018. 27 Currently the United States, China, Japan and the European Union are the largest consumers of cooling. Emerging economies that have rapidly expanding middle classes and are located in warmer climates are expected to see a sharp increase in cooling consumption as shown in Figure 7 below. The Economist Intelligence Unit estimates that India, Indonesia, and China are the three countries with the highest annual growth rate in cooling sales - 5.6%, 5.1% and 3.1% respectively, compared to 1.4% in the US and 2.7% globally. The refrigerant gas market size is estimated to be $21.3 billion in 2020 and is projected to increase at a compound annual growth rate (CAGR) of 7.7% between 2020 and 2025. 28 25 Parliamentary Office of Science and Technology (UK): Sustainable Cooling – link here 26 The Race is on, but Cooling industry needs to accelerate net zero efforts - Cool Coalition 27 Economist Intelligence Unit (2019): The Cooling Imperative – link here 28 Markets and Markets: Refrigerants Market Global Forecast to 2025 – link here Page 36 Figure 7: Regional cooling stock projections by 205029 Estimating a total investment need for transitioning to sustainable cooling for all is challenging and has not yet been researched in detail and quantified robustly. Financing sustainable cooling is complex and uncertain as each sector or application has its specific financing needs and cooling is applied across so many sectors and regions. This report provides an overview of cooling investment needs using a conceptual approach outlined in more detail in Section 2 below to accelerate the transition to sustainable cooling which contributes to meeting the Paris Agreement, Kigali Amendment to the Montreal Protocol and the Sustainable Development Goals (SDGs). 2. Our approach Our report aims to provide insights on investment needs across several cooling value chains by responding to the following key questions raised by the World Bank: • Are there cooling investments that need to be financed on their own, or are they generally a small part of a larger project? • Are investments needed by governments, the public sector more generally, corporates, small and medium-sized enterprises (SMEs) or households? • What are relevant key performance indicators (KPIs) for measuring sustainable cooling? • Do these investments fit within the taxonomies for green investments (e.g. the EU taxonomy)? • What are the risk factors for sustainable cooling investments that could be passed to the capital market? 29Cooling stock values are extracted from the High Effort Scenario in the Cool Calculator - Cool Coalition; stock includes residential, commercial, industrial and transport AC and refrigeration Page 37 • Are the investments financially viable or do they need additional incentives? Although there are a broad range of cooling applications and value chains, our report focuses on six cooling investment archetypes that have significant potential in terms of climate change, economic and sustainable development impact. Each archetype is defined and characterised with a specific example to respond to the questions listed above. There are different ways that cooling archetypes can be conceptualised so this is neither a comprehensive nor exclusive list. However, our aim is to use these six cooling archetypes to explore cooling investment needs to inform the World Bank’s work on the potential need for new sustainable cooling financing structures. The six archetypes are: 1. Cooling manufacturers 2. Government 3. District cooling 4. Real estate development 5. Food cold chains 6. Data centres The report is split into four main Sections. In Section 3, we investigate bond issuers that use proceeds for clean cooling, which includes the cooling manufacturers and government archetypes. In Section 4, we focus on cooling applications which encompasses the remaining five archetypes. In Section 5, we discuss cooling as a service as an example of a viable business model to address high CAPEX barriers across multiple cooling applications. Section 6 finishes with concluding insights and recommended next steps. Our findings result from a combination of desk-based research and stakeholder interviews with industry experts (see Table 1 below) as well as our cooling experience over more than 15 years of accelerating cooling technology innovation and sustainable cooling deployment in applications ranging from industrial and buildings energy efficiency to off-grid clean technologies in emerging markets. Table 1: Interviewee list Organisation Interviewee World Bank India Ajay Mangotra and team University of Birmingham Toby Peters SDCL James Maguire and Peter Hobson International Solar Alliance Ajay Mathur SeforAll Brian Dean and Ben Hartley ClimateWorks Foundation Shilpa Patel Danfoss Andrea Voigt Page 38 Rocky Mountain Institute Iain Campbell International Finance Corporation Alexander Sharabaroff Cross-cutting observations on cooling investment needs Are there cooling investments that need to be financed on their own, or are they generally a small part of a larger project? Cooling investments can be financed on their own or as a smaller part of large investments. For example, project specific financing for cold chain development, district cooling or large-scale innovation (such as power station scale liquid air energy storage30) are cooling focused investments. In the case of real estate investments, cooling is typically a small portion of the total project costs. However, the cooling cost is directly correlated with the size of the construction project cost and efficient, clean cooling solutions for real estate can be high-cost capital items that are prone to cost-engineering when construction projects overrun (i.e. cost overruns or client pressure on budgets leads to descoping of specified efficient, clean cooling technology and replacement with less expensive but also less efficient and clean cooling systems). Are investments needed by governments, public sector more generally, corporates, SMEs or households? Given the diversity of cooling uses, cooling investments are likely to be needed by all these groups. This is likely to initially be driven by governments/public sector, corporates (e.g. manufacturers, supply chain, energy sector, real estate) and innovative SMEs of breakthrough cooling technologies. Households may be the recipient of the benefits of debt financing such as loan facilities and guarantee programmes. Are the investments financially viable, or do they need additional incentives? The imbalance between the high initial outlay and the future benefits (i.e. high CAPEX, lower OPEX) is a barrier to investment, with or without debt financing. Clean cooling is not perceived as a direct revenue driver but a cost reduction measure (primarily through energy efficiency). Smoothing the cashflows of the initial CAPEX may help to incentivize accelerated deployment of clean cooling solutions. Currently, co-benefits of clean cooling are not priced into investment decisions (e.g. improved thermal comfort, reduction of the urban heat island effect, and reduced food loss). Additional incentives are likely to be needed to drive large scale intervention. For example, to support the uptake of efficient appliances in developing countries or to develop district cooling which are perceived as having much higher CAPEX but have greater environmental and climate benefits than single units. 30 Highview Power funding announcement – link here.) Page 39 Do these investments fit within the taxonomies for green investments (e.g. the EU taxonomy)? Some of the investment archetypes that we explore would fit within current taxonomies for green investments. However, finance taxonomies (e.g. the EU, South Africa, Malaysian, Climate Bonds Initiative (CBI)) are incomplete and continue to evolve. The expectation is that cooling technology will be included in such taxonomies over time as it is a critical service to many forms of business. When viewed as a component of other categories (e.g. green buildings), cooling is present within taxonomies (e.g. CBI, International Capital Market Associations (ICMA)) where it might not be explicitly mentioned. The EU taxonomy covers district cooling, cogeneration of heating/cooling and power from bioenergy/solar thermal/geothermal/renewable energy. It is important to note that other services (e.g. hydrogen) produce significant quantities of waste cooling that could be employed to good effect as waste to cooling services. What are relevant KPIs for measuring sustainable cooling? Traditional thematic bond KPIs have focused on energy efficiency (e.g. reduction in GHG emissions; higher EPC ratings) but cooling specific KPIs can be incorporated in certain bond structures. Relevant KPIs for measuring sustainable cooling are largely at a conceptual stage and still need to be identified and validated with key stakeholders. What are the risk factors for sustainable cooling investments that could be passed to the capital market? Sustainable cooling investments exhibit at least some of the traditional investment risks that face other sustainable assets, namely: • Lack of familiarity among investors; • Lack of bankable projects to finance; and, • Low levels of liquidity. These have traditionally been overcome in debt capital markets by balancing the financing needs of beneficiaries with higher coupon rates paid to incentivise investors. However, in the case of sustainable cooling, these higher rates can pose a problem for corporates who may struggle to repay outstanding debt due to a number of factors. These include: • Mismatches between the CAPEX requirements (i.e. upfront costs of sustainable cooling) and the OPEX savings (i.e. from energy efficiency over the longer term) and the lag between these; • Technological improvements that lead to cheaper, more efficient solutions also take time to come on line, and require shifts in consumer behaviour to gain the necessary scale for consistent, positive cashflows that can give bond investors comfort; and, • Climate-vulnerable countries with high sustainable cooling gaps tend to score poorly according to metrics on ease and attractiveness of doing business. This is in addition to the fact that climate finance tends to be deployed domestically, with international flows of funds still limited. Page 40 These are all risks that can be passed onto the capital markets using non-traditional structures that can leverage some of the innovative financing mechanisms that have had success in the sustainable cooling space and which are discussed in further detail in the sections below. One example is blended finance, although ideally this should be deployed where sustainable cooling is able to produce positive cash flows to investors. 3. Green Bond Issuers Archetype 1 – Cooling Manufacturers Archetype profile • Purpose is to provide cooling appliances and products – these can be part of a wider portfolio of brands/products sold (e.g. other white goods etc.) • High CAPEX businesses and high OPEX for which cooling represents a modest margin business • Their business assets (e.g. manufacturing sites) are long term assets (~50 years) • Manufacturers retool manufacturing plants every 10 – 15 years to accommodate the production of new equipment • High Research and Development (R&D) overhead • Cooling specific R&D as a percentage of net sales only averaged 2.2% which falls well below the Capital Goods average of 3.5%31 • Cooling manufacturers have complex value chains The cooling supplier archetype includes: 1. National cooling equipment manufacturers 2. International cooling equipment manufacturers 3. National cooling appliance manufacturers 4. International cooling appliance manufacturers 5. Specialist cooling equipment providers (e.g. high temperature heat pumps) Example of investment need: International cooling appliance manufacturers, Electrolux green bond issuance There are 14 cooling manufacturers (see Figure 8) that have signed up to the Race to Zero and will need to halve their emissions by 2030 to meet a net zero target by 2050. This means that companies will need to address the emissions generated by the use of their products sold throughout the lifetime of their use. A key lever to achieve this is to deliver more efficient cooling appliances (e.g. refrigerators, split air conditioning (AC) units etc.). To do this, manufacturers need to re-tool their manufacturing lines. 31 CDP (2020) Playing it cool: which cooling companies are ready for the low-carbon transition? link Page 41 Electrolux is a multinational home appliance manufacturer that sells cooling appliances (ACs, refrigerators, freezers) among other products, and has been a market leader in terms of climate action. Electrolux offers appliances with high levels of efficiency performance and recently made a commitment to be net zero by 2050. In March 2019 the company established its first Green Bond framework in alignment with Green Bond Principles. Electrolux issued its first Senior Unsecured Green Bond with the following characteristics: • SEK 1billion • Five-year tenor to finance investments aligned with the Green Bond Framework32 • Proceeds from the bond have been used to finance and re-finance investments that are aligned with the Green Bond framework. Eligible Green Assets amounted to SEK 2.4bn by end of 2021. • Bond Maturity: March 2024. • Cooling is a component of this investment but not the sole part This Green Bond issuance demonstrates a market leader’s appetite and drive to unlock investment to deliver sustainable cooling solutions. It also signals to the market and investors concrete actions that large manufacturers are taking. 32 Electrolux’s green bond framework has five categories: Improve product performance and efficiency; Achieve more with less; Eliminate harmful materials; Climate targets Page 42 Figure 8: Segmentation of cooling suppliers based on proximity to join the Race to Zero November 2021 (Carbon Trust analysis) We have included observations against each of the key questions raised by the World Bank Group noted in Section 2 in the following table drawing on the Electrolux example and broader observations on this archetype. Investment • Part of bond funds are allocated to retooling two manufacturing facilities need (refrigerators and freezers) to make new appliances more efficient and install the infrastructure and services needed to integrate low global warming potential (GWP) (<=15) refrigerants in the appliances. KPIs • Cooling appliances will be 15% more efficient than the average efficiency of the appliances in the product range. • Estimated greenhouse gas (GHG) emissions reduced is 2 Mt CO2 per annum: - 93% of these emission reductions will result from the elimination of harmful materials (including high GWP refrigerants); - 6% of the GHG emissions reductions are from improved product performance and efficiency improvements; - The remaining 1% of GHG emission reductions result from activities related to ‘achieve more with less’ and ‘climate targets’. 53% of Page 43 disbursed amounts are allocated to this latter category which only contributes to 1% of the GHG emissions reductions. 47% of disbursed assets are allocated to the other activities, which have higher emissions reduction impact. Taxonomy • This bond was validated by external assurance. • Electrolux’s Green Bond Framework has been prepared based on the ICMA Green Bond Principles (June 2018). Investors • Pension funds, life insurance etc. Risk factors • The key risk to cooling manufacturers is associated with the development and deployment of new, efficient technologies in the sustainable cooling space. This is an internal investment decision that carries with it the risk of high R&D costs not being met by sufficient uptake to ensure a commercially viable solution. • The size and location of the cooling manufacturer also remains a factor in how successful cooling manufacturers are in accessing capital markets. Large multinationals such as Electrolux are already able to place debt in the market, but smaller, regional players face a number of barriers that limit their ability to raise sufficient funding to undertake the changes needed to remain competitive. Financial • High financial viability as Electrolux is an established entity with strong viability of the capital investment and debt financing track record. investment • Use of proceeds of the bond focused on activities with low risk as SEK1bn is used for re-financing incremental changes within existing business-as- usual activities (e.g. retooling manufacturing lines, increasing operations efficiency etc.). Example of investment need: mobile air conditioning manufacturers The mobile air conditioning (MAC) / vehicle thermal management market has until quite recently been a relatively staid technology market where periodic innovation quickly lapses to cost engineering. Supply chain optimization for original equipment manufacturers (OEMs), including mobile air conditioning manufacturers, is driven by vehicle manufacturers which leads to essentially universally accepted technology solutions. For example, R134a was historically the refrigerant of choice for almost all automotive MAC systems and this has now switched across to R1234yf for almost all such systems. Support for MAC products must be simple and capable of being undertaken by a motor mechanic. This requirement means solutions must be modular with little intervention required by support staff. Page 44 Innovation is by a small group of industrial companies (e.g. Denso, Mahle) who design products to challenging technical briefs (e.g. output requirements, space and power limitations, weight, safety and the environment). It is important to note that these companies are typically diversified vehicle component manufacturers (i.e. not specifically MAC companies). A representative review of MAC equipment manufacturers has highlighted that the switch over to electric vehicles (EVs) will drive significant product innovation in the market . A transition from cabin thermal cooling to broader EV thermal cooling management is underway. New innovations are materializing that permit EV batteries to be charged more quickly and/or hold on to more of the charge for longer. These manufacturers have sustainability reports that articulate a desire to align with the goals of the Paris Agreement and therefore will, like other types of manufacturers, be investing in infrastructure to retool product lines to build the next generation of thermal management technologies. At least one manufacturer – Denso – has created a sustainability bond that can be used to fund renewable power at its manufacturing sites and support switch out of harmful materials. Other manufactures (e.g. Mahle) have Debt Issue Frameworks that specifically refer to the development of cooling innovations. There is likely an opportunity to influence this market. Archetype 2 – Government Archetype profile • Purpose is to ensure cooling is delivered in an efficient and climate-friendly way to meet countries’ Nationally Determined Contributions (NDCs) and Kigali Amendment commitments; and build cities’ resilience as temperatures rise • Active cooling is high CAPEX; passive cooling is typically low CAPEX for new buildings and requires cross-department coordination • Cooling assets are long term assets 20+ years (e.g. buildings, hospitals, schools, other infrastructure) • Replication potential depends on the building and infrastructure format and whether the opportunity relates to new build or retrofits – there is low to high consistency in technology solutions • The technology and infrastructure risk will be similar • Support and maintenance can be standardized Government cooling activities include: 1. Infrastructure project development/procurement 2. Public sector facilities development/procurement 3. Building regulations, governance, and capacity development for efficient systems implementation Page 45 Example of investment need: Government implementation of a National Cooling Action Plan National Cooling Action Plans (NCAPs) are tools to assist countries in identifying pathways to integrate comprehensive action to reduce energy related emissions from cooling aligned with plans related to reducing GHG emissions. These plans are meant to lay out specific steps countries can take to better regulate the cooling sector and make sure cooling is delivered in the least harmful way. Through the Clean Cooling Collaborative (CCC, formerly the Kigali Cooling Efficiency Program), 20 countries have been receiving support to develop their NCAPs. All these countries are emerging economies located in warm climates with high exposure to temperature rises. India, China, Trinidad and Tobago, Rwanda, Kenya, Panama, Lebanon, Cuba and Grenada have all published their NCAPs and are working on implementing these strategies. India’s Cooling Action Plan was launched in 2019 and provides a 20-year perspective with actions needed to provide access to sustainable cooling. The plan seeks to: (i) Reduce cooling demand across sectors by 20% to 25 % by 2037 – 38; (ii) Reduce refrigerant demand by 25 to 30% by 2037 – 38; (iii) Reduce cooling energy requirements by 25% to 40% by 2037 – 28; (iv) Recognize ‘cooling and related areas’ as a key area of research under the national Science and Technology Programme; (v) Training and certification of 100,000 servicing technicians by 2022-23 The ICAP is critical to mitigating India’s projected growth in coo ling demand and related GHG emissions. If cooling is supplied with conventional solutions, the aggregated nationwide cooling demand in Tonnage of Refrigeration (TR) is projected to grow significantly by 2037 – 38 as compared to the 2017-18 baseline as shown in Figure 3.33 33 India Cooling Action Plan – link here Page 46 Figure 9: India's projected sector-wide growth in cooling demand (ICAP, 2019) The expected benefits of the ICAP linked to broader socio-economic opportunities tied to cooling include: • Thermal comfort for all, particularly in affordable housing contexts; • Sustainable cooling – low GHG emissions related to cooling; • Doubling farmers’ incomes – better cold chain infrastructure enables better value of produce to farmers and less wastage of produce; • Skilled workforce for better livelihoods and environmental protection; • Made in India – domestic manufacturing of air-conditioning and related cooling equipment; • Robust R&D on alternative cooling technologies – to provide a push to innovation in the cooling sector. The ICAP has not yet been implemented and is currently missing an implementation plan or enforcement mechanism in the action plan.34 The World Bank team in India is working on developing a financeable plan with concrete timelines and targets. Investment • Investment is needed to implement NCAPs through cooling specific need programs, enforcing a robust enabling environment to deploy passive cooling and more efficient cooling systems. This includes through building code/regulation upgrades, enhanced minimum energy performance standards (MEPS) but also capacity building and integrating sustainable cooling conditions within sector programs – e.g. affordable housing, health or food cold chain development. 34 Shakti Foundation Policy Brief on ICAP – link here Page 47 KPIs Examples of potential KPIs include: • Enhanced building codes • Stronger MEPS with ratchet provisions to increase performance expectations over time • Number of cool roofs • Reduced Urban Heat Island effect (UHI) through greenery and passive cooling methods for affordable housing projects Taxonomy • Energy consumption of cooling impacts EPC rating of buildings and therefore affect the level of compliance with EU taxonomy and/or green buildings standards for cold stores Investors • National governments, municipalities, public service providers/agencies (e.g. healthcare systems, education boards, etc.) Risk factors • National and subnational governments (e.g. municipalities etc.) face competing climate priorities, both political and economic, that may affect their appetite for sustainable cooling investment as a standalone. • Unlike commercial applications, public sector sustainable cooling solutions have cash flows that are harder to quantify (e.g. district cooling with cashflows linked to tax revenues) which complicate the decision-making process for investors. • Currency and/or foreign exchange risk remains in issuance where sovereign and/or sub-sovereign entities issue and service debt in one currency (e.g. USD, EUR, GBP, etc.) but deploy funds and receive cash inflows in another, usually domestic, currency. Financial • High financial viability as sovereign issuers are established capital viability of markets actors with a long debt financing track record. This does depend the to some extent on who the issuer is and whether there is appetite in the investment market to take on sovereign credit risk. • Sub-national issuers pose more of a credit risk as the track record for issuance, especially in developing countries, is not as built out and there is a dependence on the development of local and/or regional capital markets. • Sovereign and sub-national issuers may need capacity building to understand the mechanics of thematic bond issuance (e.g. use of proceeds; KPIs and SPTs) and how they fit into their development agenda in order to identify projects that can benefit from capital markets financing. Page 48 4. Cooling applications Archetype 3 – District Cooling • Purpose to deliver centralized cooling services across several user types (e.g. commercial, residential, industrial) simultaneously • Cooling component is high CAPEX and low OPEX • Cooling assets are long-term assets (30 years) • There is high replication potential, medium consistency in technology solutions (a district cooling system is a network with pipes and cooling technology designed to fit specific local / district conditions) • Technology and infrastructure risk – examples include infrastructure risks like water pipes that can be damaged accidently • Support and maintenance can be standardized • This archetype can support various business models (e.g. Cooling-as-a-Service) District cooling use cases: 1. District cooling developers 2. Building developers – residential and commercial cooling 3. Industrial users 4. Hospitals 5. Municipalities Example of investment need: District cooling development District cooling systems are more energy efficient than traditional air-conditioning systems for cooling dense applications and can generate savings of ~20%. Designing district cooling systems is challenging as it combines cooling technology, storage, pipes and networks fitted to the specific conditions of the location of the development. It also requires a coordinated approach to planning projects especially where projects require greenfield and urban planning permission. Agreement and collaboration across several stakeholders (e.g. businesses, municipalities, developers etc) is required. As a result, a need for strong experience and high capital cost are key characteristics, and often barriers to, the development of district cooling systems. Developing countries often lack the local engineering and procurement expertise which results in the need for substantial technical assistance and finance support to be able to develop and de-risk these projects to a point where infrastructure investors can carry out due diligence and commit to the project. Financing district cooling is typically large scale given the size of projects involving national and international financial institutions and local and international utilities. Local and national authorities can invest in cooling through their procurement processes which involves activities such as project mapping, feasibility and design stages in pre-procurement phases to identify Page 49 energy-efficient and ultra-low GWP refrigerant district cooling systems. Increased capacity of manufacturers and project developers is required to progress projects from concept to investment readiness. City planners require awareness to support district cooling rather than leave the deployment of cooling solutions to individual household/business equipment purchases. An example of an investment structure for district cooling based on a procurement mechanism is shown in Figure 10 which highlights the range of organisations and links involved in these projects. Figure 10: District cooling procurement mechanism35 Established district cooling developers (e.g. Engie, Tabreed) have been able to access equity financing for the development of their services in new markets (e.g. India). To expand existing services, their approach is typically to focus on attracting debt. Developers are designing green bond frameworks for specific markets. Investment • Tabreed developed a Green Financing Framework to issue green bonds need and loans with the resulting net proceeds to be used for financing eligible assets such as constructing, acquiring and operating district cooling schemes in UAE. KPIs Potential KPIs include: • kWh saved • Avoided emissions 35 Clean Cooling Collaborative and Carbon Trust Cooling Finance Case Studies – link here Page 50 • Refrigeration tons of new customer connections added Taxonomy • Green Financing Framework has been developed in accordance with the ICMA Green Bond Principles 2021 and the Loan Market Association Green Loan Principles 2021 Investors Example investors include: • IFC, World Bank, EBRD, Engie, pension funds, others Risk factors • District cooling investments require high CAPEX with a longer lead-time to generate positive cash flows which are, depending on the nature of the ownership and/or operation of the network, sometimes difficult to identify (e.g. tax revenue to subnational governments) • Additionally, district cooling projects may prove difficult to disaggregate from broader urban and/or infrastructure projects (e.g. urban regeneration, industrial complexes etc.) in which they are a component. Financial • Financially viable in developed markets in cooling dense areas given the viability of number of district cooling schemes around the world (e.g. Paris, the Singapore etc) but limited by complications including legacy investment infrastructure. • Also financially viable in developing markets in cooling dense areas but at times limited by a lack of local/regional demonstrations – for examples, see these UN Environment and Clean Cooling Collaborative links. Archetype 4 – Real estate development Archetype profile • Purpose is to provide a serviced building – thermal comfort • High CAPEX – low proportion associated with cooling • Typically standalone, developers focus on CAPEX and not OPEX and want to keep CAPEX low • Cooling assets are long term ~20 years+ • Replication potential depends on the building format – low to high consistency in technology solutions • The technology and infrastructure risk will be uniform • Support and maintenance can be standardized Space cooling use cases in real estate development: Page 51 1. Standalone office block or flats 2. Commercial, retail and hospitality (design once then repeat several times using the same format) 3. Residential developments 4. Refurbishment of existing facilities that use, or could use, cooling equipment Example of investment need: Commercial office block development In a Baseline Scenario (based on historical trends, existing equipment, and MEPS), the IEA estimates that the total space cooling output capacity of residential and commercial ACs will significantly increase (triple for residential AC and at least double for commercial AC), as shown in Figure 11 and Figure 12.36 This covers both existing and new building developments. For residential AC, China and India are the largest drivers of this growth and they are also key contributors to the growth in commercial AC cooling capacity alongside the United States. Reducing cooling energy consumption is critical to reducing cooling related emissions from buildings. Where cooling is powered by fossil fuel energy sources, it is also key to limiting the additional strain cooling puts on power grids particularly from air conditioning which tends to operate during peak times and drives marginal build out of electricity grids. City authorities have a key role to play in reducing emissions from the buildings sector and as a result promote the uptake of more efficient solutions. 52 regions and 1,122 cities are members of the Race to Zero which commits them to meeting net zero by 2050 and halving their emissions by 203037. As part of this process, these cities are developing and implementing plans to meet their targets and will need financing to roll out projects and facilitate the uptake of more efficient, clean cooling solutions. Figure 11: Residential AC cooling capacity in IEA's Baseline Scenario by country/region 36 IEA The Future of Cooling 37 Climate Champions: The Race to Zero – Who’s in? Link here Page 52 Figure 12: C mmer ial AC ling a a i y in I A’s aseline enari y un ry regi n Replacing or installing new cooling equipment in commercial buildings represents about 5 – 10% of the cost to value. Building landlords tend to bear the CAPEX and OPEX of cooling systems. Most of the time landlords have multi-tenancy agreements and offer contracts with service charges included to cover office bills. Occasionally, landlords offer the flexibility for tenants to stay in charge of their own bills, including energy consumption. In some instances, building developments are part of a portfolio of investments within a fund that has building ownership plans of 3 – 5 years to maximize profit making opportunities. Revolving ownership of buildings and changes in tenancy occupancy are additional barriers alongside high CAPEX for the uptake of more efficient, clean cooling equipment. Energy service company (ESCO) and Cooling-as-a-Service (CaaS) models described Section 5 of this report are cost-effective solutions to overcome CAPEX barriers. These tend to be mid to long- term agreements (similar to the lifetime of the equipment) and are typically sub-contracted agreements between building developers and service providers. For developers, having an additional contract and stakeholder engagement to manage can be seen as an additional administrative burden and may not be aligned with their business plans or can be difficult to handle within their multi-tenancy agreements. Drivers of uptake of efficient, clean cooling equipment for building developers include: • Cost saving opportunities – reduced OPEX; • Compliance with minimum energy efficiency standards and green building standards; • Higher demand for green buildings and more comfortable offices – with the move away from full-time in person work, companies look for offices that can meet hybrid working needs with less space but better quality; and • With climate change and rising temperatures, there is a higher risk of offices overheating and an increased need for better insulated buildings with efficient, clean cooling. Page 53 Investment • Raise the uptake of more efficient cooling equipment into office need building blocks. KPIs • kWh saved • Avoided emissions • OPEX reduction • Improved EPC rating Taxonomy • Energy consumption of cooling impacts EPC rating of buildings and therefore affect the level of compliance with EU taxonomy and/or green buildings standards Investors • Building developers, property investment funds Risk factors • Tenant occupancy • Central cooling versus unit-specific cooling (i.e. tenants own smaller AC systems) • Property type (e.g. residential, commercial, mixed-use, social/affordable housing) Financial viability of the • Depends on the nature of the real estate development, and the type investment of AC used (i.e. central or unit-specific) sustainable cooling Page 54 Archetype 5 – Food cold chain Archetype profile • Purpose is to deliver cold storage facilities and refrigerated transport • Normally high CAPEX and a high proportion associated with cooling • Cold chain is an integrated system therefore needs other system elements planned or deployed for it to be sustainable (e.g. transport infrastructure) • Cold chains are long terms assets --> ~30 year+ assets • There is a high replication potential (e.g. design of a cold store is the same technology that can be deployed in different places) and high consistency in technology solutions • The technology and infrastructure risk will be similar • Support and maintenance can be standardized Food cold chain equipment use cases include: 1. Logistics integrator / cold stores developers 2. Food processing plants 3. Agricultural facilities (farmers etc.) 4. Refurbishment of existing facilities that use ‘cold equipment’ Strengthening agriculture (horticulture, dairy, fisheries etc.) and food value chains is a priority for many countries. The lack of effective refrigeration today directly results in post-harvest losses of 475 million tonnes or 13% of total food production, which is enough to feed approximately 950 million people in a world where 690 million people are hungry and 2 billion suffer from food insecurity.38 Moreover, the food that is produced and not eaten results in an estimated 4.4 Gt CO2e of GHG emissions annually, which is about 8% of total global GHG emissions.39 The demand for food cold chain and space cooling is expected to increase significantly which is influenced by: climate change (increasing temperatures, humidity, droughts and flooding are expected to reduce food production capabilities); urbanization; a growing middle-class and increasing incomes; changes in shopping patterns; a rise in demand for higher quality and safer food; growth in demand for frozen food; and the global food trade. The food cold chain is a complex system with many static and moving elements from farms and fisheries to consumers. Developing it sustainably is complex and there are diverse and interconnected drivers and barriers that depend on the local economic, environmental, social, cultural, and political circumstances. Cold chains refer to managing the temperature (at specified low-temperature range) and ideal conditions (particularly humidity level) of perishable products to maintain quality and safety from the point of origin through the distribution chain to the final consumer as shown inError! Reference source not found.. 38 Clean Cooling Collaborative, 2021. Sustainable cold chains: The missing link for sustainable development 39 UNEP 2021, Food Waste Index UNEP Food Waste Index Report 2021 | UNEP - UN Environment Programme Page 55 Figure 13: Schematic overview of food cold chains40 Sustainable cold chains for food can be defined as a safe, monitored, and integrated refrigerated network designed with cooling technologies that use environmentally friendly refrigerants and maximize the efficient use of low carbon energy beyond typical or business-as-usual energy sources and the typical level of efficiency observed in the sector. Where possible, solutions should reduce the need for mechanical cooling in the first place using passive design measures. Where mechanical cooling is needed, efficient and high performing technologies should be powered by clean energy sources and/or utilizing alternative technologies (such as phase change materials), through which measures the climate impact is significantly reduced. Finally, cooling technologies should use refrigerants with lower GWP than legacy and conventional technologies, supporting the goals of the Kigali Amendment. Cooling investments in food cold chain projects may target different components of cold chains. The projects could include efficient, clean built infrastructure (e.g. warehouses, walk-in refrigerators and freezers) and cold storage equipment (e.g. refrigerators and freezers as well as passive cooling solutions) or refrigerated transport equipment (e.g. refrigerated trucks). Cold chain deployment and growth depends on the stage of economic development and nature of the agri- food sector, and wider preferences for food. With global population forecast to reach 9 billion by 2050, food 40 Net Zero Cold Chains for Food: A Discussion Document on the Case for Philanthropic Action (2020) - link here Page 56 demand is set to grow by 50% during that time.41 The global middle class is predicted to increase from two billion to five billion by 2030 with the majority being in developing countries, accelerating the shift towards urban living and more calorie-intensive diets.42 As a result, cold chains encompass some of the fastest growing cooling segments (e.g. transport refrigeration) based on the Economist Intelligence Unit’s projections of cooling sales between 2018 and 2030 (as shown in Figure 14 below).43 Figure 14: Cooling sales: average annual growth rate by sub-sector (2018-2030) (EIU, 2019) Investment • Investment is needed to develop net zero cold chains that reduce food need loss and avoid emissions from high GWP refrigerants and inefficient equipment. This will require a system transition with action across many stakeholder groups to create low carbon infrastructure, access to reliable, clean energy, and appropriate operating procedures, as well as supportive policy, regulation, and commercial incentives. KPIs Example KPIs include: • Reduced/avoided food loss • Improved farmer incomes Taxonomy • Energy consumption of cooling impacts the EPC rating of buildings and therefore affect the level of compliance with EU taxonomy and/or green buildings standards for cold stores 41 FAO. How to feed the world in 2050 – link here. 42 Carbon Trust (2015): The emerging cold economy – link here. 43 EIU, The Cooling Imperative (2019) – link here Page 57 • Refrigerated transport (i.e. trucks) are also addressed by various taxonomies, under both cooling and clean transportation. However, further clarity is expected over the course of 2022-23 in this area. Investors • Supermarkets • Food and beverage businesses • Logistics companies • Cold store developers • Private equity investors (e.g. Arch Emerging Markets Partners) Risk factors • Meeting minimum utilization levels for cold stores (to be effective this would need to account for cold stores operating within wider value chains which depend on other infrastructure including road and other transportation routes). Financial • This depends on the food cold chain and organizations involved. We viability of the investment expect there are profitable investment cases for large organizations producing or shifting high value produce – this may be more likely when there is at least some integration in the food cold chain to reduce the likelihood of gaps in the system and to avoid incentives being split between too many different actors/organizations. • The investment case for more fragmented cold chains for lower value produce or crops may be more marginal and, in some cases, unviable. Connecting farmers to markets is an integral part of cold chains ecosystems. Identifying innovative ways to create these connections is critical to reduce food loss and increase farmers’ income. The case study below describes Agromovil’s batch, match and pay model developed in 2018 to facilitate market connectivity in rural last mile contexts. Page 58 CASE STUDY: Agromovil Agromovil is a mobile supply chain platform designed to connect farmers with markets and create insights that help companies and coops plan, manage risk and track impact; with the aim to increase farmers income and reduce food loss. Their business-to-business (B2B) app-based service provides a low-cost solution to schedule on-demand transport, access micro-insurance to manage risk and connect to secure mobile banking. Headquartered in the United States, they started operating in the US and Colombia and have now expanded to Tanzania, Ghana and Nigeria. They have mapped 1,000 farms and have 1,500+ users across more than 150 communities. 500 tons of goods have been placed for sale across 80+ varieties of products. Agromovil’s partners and supporters include: USDA, USAID, The World Bank, Guinness, Coop, Toyota Mobility, Financiera Comultrasan and MinAgricultura (Ministry of Agriculture Colombia). Page 59 Archetype 6 – Data centers Archetype profile • Purpose is to cool down information technology (IT) equipment • Cooling component is high CAPEX and high OPEX • Cooling assets are mid/long term assets (10 – 15 years) • There is a high replication potential and high consistency in technology solutions • Technology and infrastructure risk is high – if there is a cooling service breakdown, it can damage data centers operations and reputation • Support and maintenance can be standardized – IT environments are relatively standardized Data centers cooling equipment use cases include: 1. Independent data center developers 2. Companies with large digital service offerings (e.g. Google, Facebook, Amazon etc.) 3. Companies that are large infrastructure providers (e.g. telecommunications) Example cooling investment: Harnessing cold energy from Liquefied Natural Gas (LNG) The data center services market was valued at $48.9 billion in 2020 and is projected to increase to $105.6 billion by 2026.44 Drivers of growth include: remote working trends; digitization of existing processes; and an increase in the number of SMEs adopting digital technologies. Cooling in data centers can account for up to 40% of their total energy consumption. While building data centers in cold environments like the Arctic Circle or in the sea are one approach, energy-efficient technologies are also needed to cool thousands of data centers located in warmer climates. Data center companies are setting carbon neutral targets for 2030 and are looking to reduce climate impacts of data centers through improved energy-efficiency, the use of carbon-free energy, looking for ways to recycle heating and cooling; and rethinking building and data center design. For example, Singapore is a leading data center hub for Southeast Asia with 50% of the region’s data center capacity and is seeking to develop a way of storing cold energy released from the liquified natural gas (LNG) re-gasification process and using it to cool data centers. Investment • Develop a new cooling medium to efficiently store and carry cold need energy from LNG terminals to various data centers. Exploring the use of water-based phase-change fluid as thermal energy carriers to replaced chilled water as a cooling medium. With a thermal density two to five times higher than chilled water, it is also hoped that it will 44 Data Center Services Market | 2022 - 27 | Industry Share, Size, Growth - Mordor Intelligence Page 60 reduce the amount of water and power required to cool data centers.45 KPIs • Reduced energy consumption • CO2e reduced/saved • Percentage of the time a data center facility is operational, compared to the total period being measured (this is often express in ‘nines’)46 Taxonomy • EU taxonomy includes data centres Investors • Large digital service providers; large telecommunications providers Risk factors • Data center availability (i.e. the percentage of time a data center facility is operational compared to the total period being measured) Financial • Rapid growth of data centers across geographies and the importance viability of the investment of effectively managing cooling loads to ensure data center availability and efficient operation of the data center (given the significant proportion of energy spend accounted for by cooling) suggests data center investments are viable in a range of applications 5. Business models CaaS is an innovative business model for end-users to access clean cooling on a pay-per-unit basis. Ownership of the system stays with the technology provider or the Energy Service Company (ESCO) which covers operational costs and is incentivized to deploy the most efficient solutions. ESCOs are companies that provide energy service solutions to customers that pay for themselves (and provide a return to the ESCO) through the savings on energy bills they generate. The ESCO typically guarantees the performance of energy-efficient solutions and may or may not provide customers directly with finance for the investment. CaaS is typically technology agnostic and can be used as a model for cold chain, space cooling or refrigeration applications. CaaS and ESCOs offer the potential to address higher upfront capital barriers and help to align incentives for more efficient equipment between cooling suppliers and end users as the responsibility for operation and maintenance of the cooling equipment is transferred to CaaS/ESCO provider. The ESCO model is best suited to applications/sectors with large and consistent energy bills (e.g. large energy intensive industries, municipalities, schools, universities and hospitals), while SME markets with relatively smaller, less predictable energy bills are less suitable for ESCOs. For real estate development, project developers tend to favour the purchase of equipment and limit the number of services that are 45 Singapore's LNG Terminal could be used to cool data centers - DCD (datacenterdynamics.com) 46 https://www.serverroomenvironments.co.uk/blog/data-centre-design-availability-tier-ratings Page 61 outsourced. End users also need to be familiar with and trust energy service company models and operations. CaaS often lacks access to commercial debt and ESCOs lack their own collateral preventing them from accessing debt financing for growth. The unfamiliarity and complexity of their business model to end- customers can also limit take-up. Financing CaaS through private investment funds typically minimizes guarantee/collateral requirements. A risk reducing mechanism can help attract private investment, but existing contracts and structures are not necessarily transferable across geographies. Figure 15 and Figure 16 below illustrate two financing structures for sustainable cooling with CaaS contracting. The former shows a Special Purpose Vehicle structure for operation and maintenance of clean cooling equipment delivered by a service provider which purchases the efficient equipment from an ESCO or technology provider. The latter is a lease agreement where the financial institution owns the cooling equipment and leases it to the technology provider which sells its cooling services through a CaaS contract. Figure 15: CaaS Financial Structure 1 using a Special Purpose Vehicle47 47 Clean Cooling Collaborative and Carbon Trust Cooling Finance Case Studies – link here Page 62 Figure 16: CaaS Financial Structure using Sale and Leaseback48 6. Conclusion Cooling cuts across many value chains and different sectors. The financing needs associated with transitioning to sustainable cooling have not yet been quantitatively or robustly analyzed. Assessing cooling investment needs comprehensively is therefore challenging. This is the first-of- a-kind study that aims to assess the investment needed to meet a pathway to decarbonize cooling. The findings include qualitative insights on investment needs and structures based on the information gathered within the scope of the project timeframe and budget based around six key cooling archetypes. This work has shown that the cooling sector, as examined through six archetypes, is beginning to engage with sustainable finance instruments specifically or in part to target clean cooling opportunities (e.g. retooling factories to produce green cooling appliance, district cooling). Other cooling opportunities are serviced through conventional financing instruments (e.g. cooling funded as part of a larger real estate project but with cost reduction pressures on the sustainability of the cooling equipment) or in areas where financing structures do not currently cater for sustainable cooling systems (e.g. food cold chains). Based on this analysis, there are significant cooling investment needs and an opportunity to consider new cooling finance approaches/structures in a range of areas including: • Cooling suppliers: Use new financing approaches/structures to fund retooling of manufacturing facilities to produce energy efficient, low GWP cooling appliances. Requirements of green bonds in this use case could include specific design of higher efficiency appliances and required use of refrigerants below a specified Global Warming 48 Ibid Page 63 Potential level (GWP) (e.g. <=15). Manufacturers could use the green bond to raise investment, demonstrate action on clean cooling and differentiate themselves in the market. • Innovative building cooling projects: Wrap-up and ring-fence passive and active cooling measures designed into a real estate project into a cooling bond. This could be done to minimize the risk of descoping these measures at a later date if construction project costs overrun. Specific requirements of the bond may include: technical assistance to ensure optimum cooling design, use of passive measures to mitigate a significant portion of solar heat gain to reduce cooling demand, use of higher efficiency cooling equipment with refrigerants below a specified GWP level, use of building controls that achieve a minimum level of energy efficiency. Cooling output and energy performance measures could be set for the bond. Real estate developers could use a green bond to raise finance for projects, demonstrate climate action and improve their reputation. • Food cold chains: Build regionally integrated cold chain networks to enable economic development of an integrated agricultural, logistic and food processing cold chain. Existing cold chain development in, for example, Africa have shown that weakness exist due to the lack of systems thinking. Specific requirements of the bond might include: technical assistance to ensure optimum and targeted design of a cold chain that uses clean cooling technology, reduces food loss, improves farmer incomes and delivers a just transition for all parties. Cold chain developers or governments could use a green bond to raise investment for this infrastructure development, demonstrate their climate actions and support achieving climate goals. The example uses outlined above are consistent with the Net Zero Cooling Climate Action pathway.49 The pathway identifies areas of action across policy, finance and investment, technology and innovation, business and services, civil society to implement sustainable cooling interventions through passive cooling, improved product efficiency and low GWP refrigerants. For example, by 2025 multi-lateral, regional and national development banks need to significantly increase funding for passive cooling measures and by 2025 at least 50% of cooling related funds from multi-lateral, regional and national development banks need to be matched with net zero compatible solutions and leading investors to use net zero cooling standards when making finance decisions. Further quantitative and qualitative work on cooling investment needs and financing structures is needed building on this concept study to help catalyze the widespread deployment of private sector institutional investment together with public investments that accelerate progress towards net zero cooling. 49 Net Zero Cooling Action Table – link here Page 64 carbontrust.com +44 (0) 20 7170 7000 Whilst reasonable steps have been taken to ensure that the information contained within this publication is correct, the authors, the Carbon Trust, its agents, contractors and sub-contractors give no warranty and make no representation as to its accuracy and accept no liability for any errors or omissions. Any trademarks, service marks or logos used in this publication, and copyright in it, are the property of the Carbon Trust. Nothing in this publication shall be construed as granting any licence or right to use or reproduce any of the trademarks, service marks, logos, copyright or any proprietary information in any way without the Carbon Trust’s prior written permission. The Carbon Trust enforces infringements of its intellectual property rights to the full extent permitted by law. The Carbon Trust is a company limited by guarantee and registered in England and Wales under Company number 4190230 with its Registered Office at: 4th Floor, Dorset House, 27-45 Stamford Street, London SE1 9NT. © The Carbon Trust 2022. All rights reserved. Published in the UK: 2022 Page 65 Bibliography Berrada, Tony and Engelhardt, Leonie and Gibson, Rajna and Krueger, Philipp, (2022), "The Economics of Sustainability Linked Bonds," Swiss Finance Institute Research Paper No. 22-26, European Corporate Governance Institute – Finance Working Paper No. 820/2022. Bouzidi, Djellil and Denish Papaioannou (2021), "Sovereign Sustainability Linked Bonds: Opportunities, challenges, and pricing considerations." Climate Policy Initiative and Sustainable Energy for All (2021), "A Framework for Tracking Cooling Investments." Ecosystem Marketplace (2021), The State of the Voluntary Carbon Market 2021. https://www.ecosystemmarketplace.com/publications/state-of-the-voluntary-carbon-markets- 2021/ Flammer, Caroline (2021), "Corporate green bonds", Journal of Financial Economics 142, pp. 499- 516. Flugge, Mark Lester; Mok, Rachel Chi Kiu; Stewart, Fiona Elizabeth. "Striking the Right Note: Key Performance Indicators for Sovereign Sustainability-Linked Bonds", World Bank Group. Giraldez, Juan, and Stephanie Fontana, 2021, "Sustainability-Linked Bonds: The Next Frontier in Sovereign Financing" IEA (2018), “The Future of Cooling.” https://www.iea.org/reports/the-future-of-cooling ICMA (2020), "Sustainability-Linked Bond Principles." International Capital Market Association. Kölbel, Julian and Lambillon, Adrien-Paul (2022), "Who Pays for Sustainability? An Analysis of Sustainability-Linked Bonds" Larker, David F. and Edward M. Watts (2020), "Where's the greenium?", Journal of Accounting and Economics, vol. 69. Natixis (2021), "Sustainability-Linked Bonds – Investors Views." The World Bank (2021), "The Cold Road to Paris: Mapping Pathways Toward Sustainable Cooling for Resilient People and Economies by 2050" The World Bank (2022), State and Trends of Carbon Pricing 2022. Washington, DC. https://openknowledge.worldbank.org/handle/10986/37455 Page 66