Until recently green bonds were the preserve of supranational organizations such as the European Investment Bank, the World Bank and the International Finance Corp. But corporate green bond issuance has accelerated over the past year, to roughly $12 billion of the $35 billion tracked by the London-based Climate Bonds Initiative. With green bonds’ rising prominence comes a need for a single set of clear and science-based criteria for what constitutes “green.” Nuclear power is low carbon, but some would balk at calling it green. And the coal industry would like investors to count fitting a coal-fired power plant with technology to reduce carbon emissions as a clean energy project, although fossil fuel consumption is hardly carbon neutral.
“When you get into the corporate space, you’re dealing with a large number of companies, and transparency is not always as good,” says Colin Purdie, head of global investment-grade credit at London-based asset management firm Aviva Investors.
None of this means Aviva wouldn’t invest in a bond because it doesn’t qualify as “green.” It just means the firm wouldn’t call it that. And therein lies the conundrum. A lot of these bonds would hit investors’ desks even without the green label. If the market is to grow into the large liquid powerhouse its proponents want, it needs a significant roster of corporate issuers to issue green bonds.
Also at issue are third-party verifications proving that issuers are spending funds on the environmentally friendly projects the bonds were designed to finance. This has begun to happen already. More than half of the green bonds issued in 2014 included an independent second opinion on their environmental credentials, from watchdogs such as the Center for International Climate and Environmental Research in Oslo and Vigeo in Paris, according to data from the Climate Bonds Initiative.
“We take a lot more comfort when there’s been a third-party verification published at the time of the issuance,” Purdie says. “If they’re calling it a green bond, and it’s a self-determination that they’re making, we wouldn’t necessarily treat that as a green bond. I think we’d take that with a pinch of salt.”
Oversubscriptions of green bonds have become common. Much of the corporate issuance has come from Europe, with just a handful of U.S. companies pricing green offerings this year, including Bank of America, which issued a $500 million green bond, and two real estate investment trusts: $250 million from Regency Centers and $450 million from Vornado Realty Trust. But market participants expect issuance by U.S. companies to increase.
“I think the biggest concern right now is trying to grow the market and getting more issuers to issue bonds,” says Catherine DiSalvo, investment officer at the California State Teachers’ Retirement System. “We do support third-party verifications. The only problem is that it adds to the expense of issuing a green bond.”
One area that looks particularly promising in the U.S., as well as other parts of the world, is the state and municipal green bond market. U.S. issuers in 2014 included Massachusetts; Connecticut; Spokane, Washington; and the District of Columbia Water and Sewer Authority. Municipalities, especially, tend to have plenty of climate-related infrastructure projects on deck. By separating these from other financings and issuing the bond as green, they hope to bring in investors who may not otherwise buy their bonds.
“We think it’s a way of attracting investors who have mandates to invest in green infrastructure,” says Sarah Sanders, assistant treasurer of debt management for Connecticut’s Office of the State Treasurer. “I can’t quantify it, but whenever you have more orders for your bonds, it allows you to have better overall final pricing.”
In November Connecticut sold bonds that will provide $300 million for infrastructure, including a $60 million green bond for clean water projects. In the end, the state paid more for the green bond — 3.56 percent, compared with 3.06 percent for the plain-vanilla portion — due to a longer tenor. But it did attract nine SRI (socially responsible investment) investors who placed orders totaling $27.7 million, according to the state, and it plans to issue a $250 million green bond in April to fund additional clean water projects.
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