By Gilee Corral, October 29, 2014
California, your bonds just got greener.
In the wake of the 2014 U.N. Climate Summit, California’s state treasury made two bold moves on the green investment front:
What are green bonds?
According to the World Bank, a green bond is “a financial instrument that helps support climate-related projects” as a “first step” in linking climate projects with capital markets. Green bonds give financers an opportunity to invest in environmentally responsible projects and diversify their portfolio. Diversifying energy investments is increasingly on investors’ minds; as The Economist notes, “55% of pension-fund assets are exposed to climate risks (including heavier regulation of dirty industries); buying green bonds helps offset such risks.”
What makes a bond “green” is not its structure, pricing, or who purchases it - it’s what the bond funds. Although there are no mandatory restrictions, the financial industry adopted a set of Green Bond Principles outlining broad categories of fundable projects, including energy efficiency, biodiversity conservation, and sustainable land use.
Billions of dollars in green bonds support environmental initiatives across the globe:
A booming, young market
If you’ve never heard of green bonds, you’re not alone – green bonds appeared, as The Economist wryly remarks, “out of nowhere.” What started as a financial instrument to fund climate projects in the developing world has mushroomed into a trending market with issuers and regulators scrambling to get ahead of demand. Since the first green bond issued by the International Bank for Reconstruction and Development (IBRD) in 2008, international agencies such as the World Bank lead the charge in issuing and advocacy. But the market has changed dramatically in the past 12 months as corporate interest has picked up.
In 2013, Bank of America Merrill Lynch offered the first corporate new issue green bond - $500 million - and is the largest underwriter of self-labelled corporate green bonds. In fact, where the green bond market was once dominated by international development agencies such as the World Bank, half of the bonds are now issued by corporate entities. Offerings are gobbled up by investors and are generally oversubscribed – Standard and Poors predicts corporate issuance in 2014 to double the total green bond market of 2013.
Booming corporate take-up and oversubscribed investor interest are promising signs for the newest kid on the fixed-income investment block. But the market has some catching up to do, and not just in demand – green bond trading still lacks standardization, metrics such as benchmarks, and reporting models. Advocate organizations such as the Climate Bonds Initiative, active in the development of the market, are working on standardization and a “climate bond certification” process. Multilateral development banks such as the World Bank are working on reporting models and supporting efforts in the private market to develop standards, building on the foundation of the Green Bond Principles released in January.
Massachusetts, New York, D.C., and now California are trailblazing the green municipal bond market in the U.S. – government issued green bonds comprise less than 2% of Standard & Poor’s Green Bond Index – for now. As the planet heats up, so will funding demand for clean energy and climate risk mitigation. The green bond market is certainly one to watch.
References and further reading:
World Bank green bonds brief: http://www.worldbank.org/content/dam/Worldbank/document/Climate/climate2014-green-bonds-brief-091214.pdf
Climate Bonds Initiative: http://www.climatebonds.net/
“Green bonds market outlook 2014,” Bloomberg: http://about.bnef.com/white-papers/green-bonds-market-outlook-2014/
“California $2.4 Billion Sale Offers 2.48% on 10-Year Debt,” Bloomberg: http://www.bloomberg.com/news/2014-09-24/california-2-4-billion-sale-offers-2-48-on-10-year-debt.html
“Green grow the markets, O,” The Economist: http://www.economist.com/news/finance-and-economics/21606326-market-green-bonds-booming-what-makes-bond-green-green-grow