Green Bonds can benefit society — and investor portfolios
By R. Paul Herman and Srdana Pokrajac
CFOs and corporate executives courting those investors who are prioritizing sustainability in their portfolios now have a new type of financing to consider: Green Bonds. These new financial instruments seek both ecological and economic benefits.
In November 2013, Bank of America (NYSE: BAC) issued a three-year, fixed-rate $500 million Green Bond as part of the bank’s 10-year, $50 billion environmental business initiative whose proceeds will target alleviation of climate change, accelerate the shift to alternative energy resources, and spur energy-efficient economic solutions.
Showing the financial industry is getting serious, 13 major global investment banks committed to the Green Bonds Principles (GBP), a set of voluntary guidelines designed to assess issuances of Green Bonds for multiple types of investors: development banks, multilateral institutions, investment banks, and corporations. The principles also recommend transparency and disclosure, and promote integrity. Green Bonds were developed by the World Bank and the SEB Group in 2008. Green Bonds have initially attracted mostly development banks, but according to Reuters, nearly $10 billion has been raised, and half of that was raised only in November 2013.
The consortium of investment banks supporting the Green Bond Principles include: Bank of America, Merrill Lynch, Citi, Crédit Agricole, JPMorgan Chase, BNP Paribas, Daiwa, Deutsche Bank, Goldman Sachs, HSBC, Mizuho Securities, Morgan Stanley, Rabobank, and SEB. This green bond market can magnetically and systematically connect investors seeking sustainability, with companies pursuing projects that benefit society and the bottom line.
Investors in green bonds can be both private and public institutions and organizations. An example from the public sector is the purchase of $300 million World Bank Green Bonds in 2009 by the state of California—a landmark whereby California not only pursues a greener environment through policy and legislation but by investing funds as well. The European Investment Bank (EIB) raised 350 million euros on its Climate Awareness Bond (CAB).
Risk-wise, World Bank Green Bonds are AAA-rated investments which can make them quite attractive for risk-averse investors.
Skeptical investors who have questioned the viability of green projects and their return on investment can use the new Green Bond Principles as a comparison framework.
Green Bond Principles consist of four categories: the use of proceeds, the process for project evaluation and selection, the management of proceeds, and reporting on progress. The most crucial category is the process for project evaluation and selection since the viability of projects and their potential success could attract more investors. The selection of viable projects and their evaluation has not yet been fully standardized, although several sets of criteria exist—such as the Climate Bond Initiative and its Taxonomy Project that categorize climate change solutions.
The Green Bond Principles recommend the selection of projects whose environmental benefits can be described, quantified and assessed. According to CERES.org, green bond projects range across many sources of value creation: renewable energy, energy efficiency—including green building, sustainable waste management, sustainable land use—biodiversity conservation, clean transportation, clean water and drinking water.
An originator of the green bond concept is SEB Group, which also signed the UN Principles for Responsible Investment (PRI) in 2008. The PRI has sharpened its teeth since evolving into a standalone NGO.
Investors may appreciate more emphasis on quantitative data. HIP Investor has applied its methodology for rating municipal bonds across several sectors: cities and counties, healthcare, education and water management on a city and county level. HIP’s methodology rates the outcomes and results of the issuers of muni bonds, providing investors with a reliable source of numeric results and historical tracking.
Green Bond Principles are bringing a new level of commitment, understanding and a constructive race to the top. Investors seeking sustainability can benefit from ecological results as well as financial performance, which builds a better world in nature and in portfolios.