Most folks want to do what’s best for the environment (whatever they think that might be), and many companies and local governments want to be known for doing good things for the environment. To tap into those environmental sensibilities, we have seen the emergence of a market for buying and selling securities labeled as “Green Bonds.” A recent report by the Brookings Institution sees expanding growth of these securities in the municipal market
So, what’s a “Green Bond,” anyway?
A “Green Bond” is simply a security issued for any environmental or “green” purpose and then labelled as a Green Bond.
It’s not a special way to structure a borrowing (so it’s not like a “general obligation bond”), it doesn’t get any special treatment under the federal tax code (so it’s not like a “bank-qualified obligation”), and there’s no federal law program either authorizing these bonds or providing for any related federal subsidy (so it’s not like a “Build America Bond,” although there are some programs for narrow bands of projects). Instead, calling something a “Green Bond” is a way to signal to the bond market and other constituencies about the planned use of the borrowed money.
If that’s all it is, why would you call your bonds “Green Bonds”?
Advocates in the Green Bond movement cite three main reasons why your local government should, when possible, label your bond issue as “Green Bonds.”
1) Signal investors who are interested in funding these types of projects. The idea here is that over time, some investors may become particularly interested in funding “Green Bond” projects because of their environmental interests, and that may lead to an interest rate benefit to the issuer. Think of this as a spin on the idea of socially-responsible investing. That interest rate benefit doesn’t yet seem apparent in the market, but advocates hope that will change over time as Green Bonds become more common.
2) Send a signal to higher-level policymakers. As the issuance of labelled Green Bonds increases, state and federal policy makers (and their constituents) may become more aware for the need for funding a wide variety of environmentally sensitive projects, and that may lead to separate policy changed providing more direct advantages for these projects. For example, the federal government (through USDA) and the State have developed its low-cost loan programs for water and wastewater projects; perhaps growth in Green Bonds will lead to expansions in the scope of projects qualifying subsidized financing programs.
3) Send a signal to other stakeholders. Whether you’re communicating with your local government’s constituents, or perhaps with other local governments, you may find it beneficial to promote the fact that you are using your borrowing capacity for environmentally responsible projects.
What are the steps involved in creating a Green Bond issue?
The minimum step is to identify your projects as environmentally responsible and then to label your bond offering as Green Bonds.
Beyond that, the International Capital Markets Association has established a set of Green Bond Principles that cover points such as what kinds of projects can be included in Green Bond offerings, and how an issuer should monitor and report on the qualifying uses of proceeds to assure investors that the environmental efforts are being carried out. The ICMA principles include the concept of an outside certification of the qualifying use of proceeds to give comfort to those investors who are making a policy choice to invest in this manner.
Are people really doing this?
Yes, although one can’t call it a tidal wave yet.
Large companies and governmental entities have proceeded with very large issues of Green Bonds. Apple Computer issued $1.5 billion of Green Bonds in February of 2016, for example. The World Bank has issued over $9 billion in these securities for its own projects. The Commonwealth of Massachusetts sold $100 million in 2013 in what is regarded as the first Green Bond sale by a State. The Brookings article linked in the first paragraph has further examples of municipal issues.
In North Carolina, the City of Asheville labeled its $55 million revenue bonds sale in May 2015 as a set of Green Bonds. These proceeds went to infrastructure and improvements to protect water resources. Although the City stated in its bond offering documents that it followed Green Bond principles, the City did not include any reference to a third-party certification process or program for systematic tracking and reporting. Nevertheless, this is in fact a Green Bond issue.
What’s the bottom line advice to bond issuers?
If you are financing a project that would qualify under the Green Bond Principles, why not label your issue as a set of Green Bonds? This should have little or no marginal cost to you, and may have some of the benefits described above. And this doesn’t have to be a $55 million issue; whatever you have, go with that. You could even divide a bond offering between Green Bonds and others with little or no cost.
Beyond labelling, you can choose if you go further in reporting on the use of proceeds – perhaps as part of your continuing disclosure program – which again would have little extra cost. But even if you simply apply the Green Bonds label, you may find a benefit in highlighting that use of proceeds to your internal and external constituents.
For more information, here’s an FAQ on Green Bonds that’s a few years old but still useful, and here’s a more detailed discussion from the World Bank.