How Green is that Bond?
On Friday, March 13, the Wall Street Journal published an article that noted how a university parking garage in Massachusetts was financed by a bond that was labeled “green". The reporter wondered how that could be considered a proper “green” project. He wasn’t the only one.
During the past several years, investors have shown a bigger appetite for bonds that finance climate and environmentally friendly projects. This is welcome news because it has enabled bond issuers to expand and diversify their traditional base of buyers.
However, because there is no formal entity deciding what bonds can be considered “green,” a few issuers have taken liberties by issuing green bonds that don't pass the investor smell test for climate or environmental benefits. For this market to scale up through sustained, credible growth, it needs consistency around what is green and how issuers communicate benefits and impacts.
Last year, a group of financial institutions, most of them underwriters, came together to issue first-ever voluntary guidelines, called the Green Bond Principles. And last month a group of global investors convened by Ceres issued a Statement of Investor Expectations for Green Bonds that provided additional clarity around project eligibility, transparency and disclosure, from an investor perspective.
Investors, NGOs and the press can opine on the merits of particular bond issues, but it is usually after a green bond has been issued and sold. The first line of quality assurance that a green-labeled bond will actually finance credible climate and environmentally beneficial projects are the banks that serve as underwriters. Their guidance, which some are already providing, should help issuers resist designating an environmentally questionable bond issuance as “green". Deal teams, when they err on the side of caution, support the market’s integrity with the public and investors and reduce the risk that issuers will be called out for “greenwashing.”
The great need to finance clean energy and projects that support energy and water efficiency and other environmental benefits gives issuers, underwriters and investors ample opportunity to grow the green bond market without having to stretch the limits to what is green.