Financial Buffers for Climate and Environmental Risks: Nuclear CoCos and Climate CoCos

Abstract

Financial buffers for climate and environmental risks are discussed. We argue for the consideration of contingent capital instruments or Contingent Convertible bonds (CoCo bonds) for industries where severe tail risk is present and where in case of a tail event the local society is heavily affected and most likely tax payer’s money is needed to compensate for losses and start the recovery. These instruments would mainly:

(1) provide clear incentives to reduce the risks and bring transparency,

(2) makes sure that collateral and funds are available in case of a major disaster to compensate losses and make investments for recovery possible; and

(3) provide a mechanisms for investors to gain above risk-free returns in compensation for clearly upfront specified risks.

We elaborate on Nuclear CoCos and Climate CoCos.

Keywords: Contingent Capital, CoCo bonds, tail risk, climate risk, financial resilience, sustainability