Now is the time to start paying attention to green bonds. As many of you know, I haven’t been the biggest cheerleader for green bonds over the last few years. News Flash: I’m changing my tune…slightly.
When green bonds hit my radar a few years ago, I wasn’t convinced that they were worthy of much attention. Mostly issued by global development banks such as the World Bank and the International Monetary Fund, green bonds didn’t offer a pricing advantage over similarly-rated regular bonds, and nobody could agree on what made a bond “green.” People would frequently refer to the green bond used to build a parking structure in Massachusetts or the one used to build a shopping mall in Syracuse as examples of either greenwashing or, in the case of the mall, outright abuse.
What’s changed? First, we’re getting closer to having standards.
The Green Bond Principles, Climate Bond Standards, CarbonCount, Investor Confidence Project, and others have developed standards that range from how to best track proceeds to what is actually green. Moody’s is in the midst of finalizing its Green Bonds Assessment. We’ll have to see where the market eventually settles, but I am hoping for a system that ultimately allows investors to see the additionality of environmental benefits per dollar invested. At a minimum, I would like to see ratings more in line with credit ratings, so that investors can determine how “green” green bonds are in the same way that they recognize varying degrees of creditworthiness.
Second, issuers are starting to pay to have independent green ratings similar to credit ratings. Apple issued $1.5 billion of green bonds in mid-February to finance renewable energy, energy storage and energy efficiency projects, green buildings, and resource conservation efforts. Apple got an independent opinion of compliance with the Green Bond Principles from Sustainalytics and have engaged Ernst & Young to monitor use of proceeds. Also in February, the New York MTA issued $500 million of green bonds, with a marketing push that courted sustainability-oriented investors in addition to traditional buyers of MTA debt. The MTA also engaged Sustainalytics to report on its compliance with green standards. Whether the primary driver of issuing the bond as a green bond was branding of the MTA or diversifying the investor base, MTA put real money behind its independent verification. When issuers pay to have environmental claims verified without seeing an immediate yield benefit, it’s time to pay attention.
While the primary market doesn’t show any pricing benefit for green bonds, the secondary market is starting to show a tiny price advantage. In a recent study, Barclays found a 20bps pricing advantage in the secondary market for green bonds. We’ll have to watch as more data comes out, with a particular focus on meaningful benefits in the primary market. This is a start, however. As more and more investors can rely on independent verification and strong standards, there may be compelling financial reasons to issue green bonds.
I’m working with a client on a green bond engagement now and hope to be able to announce it soon!