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Green Bonds: Birth of a Sector
By Mel Miller

The Sustainable, Responsible, Impact (SRI) investing movement is definitely in the growth stage as more and more investors are convinced that climate change is a “real and present” danger. Until 2008, fixed income investors did not have an investment product whereby they could directly invest in specific corporate projects designed to benefit sustainability. Prior to 2008, “green bonds” were limited to issuance by tax-exempt organizations and/or municipalities for the development of brownfield sites.

According to Heike Reichelt, head of investor relations and new products at The World Bank, Swedish pension funds first approached the World Bank in 2007 asking for taxable “green bonds.” Institutional demand for taxable project specific “green bonds” intensified, leading to The World Bank, through its environmental department, to issue designated green bonds to finance its sustainable projects starting in 2008. A new fixed income sector was born.

Debt issuance to support energy efficient projects and renewables has rapidly increased since 2010 as companies realized the growing
investor appetite for such fixed income securities. Green bond issuance reached almost $14 billion in 2013, almost double the previous high of 2010. The totals now include both municipal as well as corporate green bonds.

According to the Climate Bonds Initiative, an international investor-focused nonprofit organization, promoting large-scale investment in the low-carbon economy, green bond issuance should reach $40 billion in 2014, nearly four times the record of 2013, and $100 billion by 2015.

Other stakeholders are trying to estimate the potential size of the market. Jim Kim the president of the World Bank has estimated the market will rise to $50 billion in 2015. S&P is not as optimistic, forecasting a rise to $20 billion in 2014—but still remarkable compared to a few years ago. Is it enough?

The recently released report from the Intergovernmental Panel on Climate Change (IPCC) points out that we must act immediately in order to limit the negative impact of climate change. To do so will come at a tremendous cost—though the costs will be substantially less than the cost of doing nothing.

According to the International Energy Agency (IEA), “in order to limit global warming to 2 degrees Celsius and avoid the worst effects of climate change, investments in low-carbon energy technologies will need to at least double, reaching $500 billion annually by 2020, and then double again to $1 trillion by 2030.” Granted, the IEA is looking at the amount of investment dollars needed and not the source of those dollars; yet companies will need to rely on green bonds to a great extent to finance such projects. Equity capital alone will not get the job done.

The green bond market traditionally has been the domain of development banks; now corporations are entering the market. According to Bloomberg, nearly $4 billion in corporate green bonds were issued during the first quarter of 2014, out of the total $7 billion in green bonds issued. Unlilever and SCA issues will fund efficiency upgrades, while Unibail-Rodamco and Vasakronan back green properties. Toyota sold $1.75 billion to finance the leasing of electric and hybrid vehicles.

Corporate bond underwriters must be pleased with investor appetite as several issues have been oversubscribed. Some of the largest underwriters are now involved in the market.

Investors like green bonds because an increasing number want to know that their investment dollars are directly sponsoring projects which are designed to reduce the negative effects of climate change. And, as stated in a report by SEB, a large Swedish underwriter, investors like green bonds because “they can get exposure to sustainable investment opportunities without giving up returns.”

With underwriter support, strong investor demand, and a growing corporate capital need; what could derail the sector? According to Cheryl Smith, Managing Partner and Chief Compliance Officer of Trillium Asset Management, “green washing” is a real risk. Self-labelled corporate green bonds might turn out to be not very green at all. In fact, sometimes you don’t know until the project is up and running whether it is “green.”

In January of 2014, The Green Bond Principles were developed by 13 banks, with an additional 12 joining in April. The Principles are a set of voluntary guidelines for use of proceeds, process for evaluation and selections, management of proceeds, and reporting. It’s a start—a way to encourage more transparency and disclosure. But further evaluation tools will need to be developed.

Fixed income rating firms like Moody’s need to take the lead. In my opinion, audit standards are also required to verify the proceeds of a green bond issuance were invested in “certified” green projects. Self-labelled green bonds leave the sector vulnerable to negative publicity.

The green bonds market needs greater transparency and auditing, but given the strong demand on the part of the issuers and investors alike, we can expect the market for green bonds will continue to flourish.


At First Affirmative, we understand that the ways we save, spend, and invest can dramatically influence both the fabric and consciousness of society. We believe that in addition to the benefits of ownership, investors bear responsibility for the impact our money has in the world. Are you making conscious decisions about the impact of your consumer purchase and investment decisions?

Mention of specific companies or securities should not be considered an endorsement or a recommendation to buy or sell that security. Past performance is no guarantee of future results.


Posted: August 7, 2014