« View All Blog Posts

Lessons from a Light Green Garage
By Charles Sandmel, Guest Author

“Green Bonds,” the long-awaited marriage of fixed-income and sustainable investing, has exploded in volume over the past few years and become a hot topic. Issuance grew from less than $1 billion worldwide in 2008 to $35 billion last year. Certification programs are beginning, indices have been created, and green bond funds have been launched. Still, green bonds are just outgrowing their infancy, and development in this new space is fraught with challenges.

I have worked in the financing of environmentally appropriate technologies for several decades, and have seen evolution in issuers’ and investors’ ability to discern what is “green,” “light green,” or “greenwash.” Forty years ago, incinerating solid waste to generate steam/electricity and reduce landfill requirements was cutting edge; however, the toxic effluents from these plants proved to be insurmountable problems. Similarly, moving coal-fired power plants away from the Los Angeles basin to Utah appeared to “fix” the smog problem; but now we know that there is no such place as “away”—especially when one is talking about air pollution. The Prairie State Energy Campus under construction in Illinois with its “clean coal” power generating station may be a step forward, but it faces serious uncertainties about its effectiveness, climate impact, and economic value.

Green paintIn December 2014, the Massachusetts State College Building Authority issued $91 million of green bonds for various projects. One of the five projects financed with that issue is a parking structure for Salem State University. The garage is designed to achieve Bronze-level certification by the Green Parking Council; the other four projects financed with the proceeds from these bonds are expected to achieve LEED Silver certification. A recent Wall Street Journal article was critical of the issue. It alleged that the garage was included in the transaction financed because the definition of what is “green” for the purpose of bond financing is deficient or inconclusive, and that any parking structure is by definition “not green.”

In my practice, I use three frames to discern green projects and the investments that finance them:

  • Does a project provide a green(er) alternative to the status quo or other options?
  • Is the overall thrust of a construction program green?
  • Has the issuer disclosed how proceeds will be used and agreed to disclosure and verification?

Salem State University largely serves commuters in a suburban/small-town setting with limited mass transit access; over 70% of its students live off campus. In this context, a parking garage is arguably appropriate infrastructure, and building one today carries an implicit mandate that it be “green.” According to the certifying group, a green-certified garage would feature increased energy efficiency and performance, reduced environmental impact, efficiency in parking space management, integrated sustainable mobility services and technologies, diversity of mobility options, and stronger community relationships. The standards envision use of green materials, charging stations for electric vehicles, sheltered transit interface, bicycle parking, and even solar panels. Based on my green rubrics, I would not disqualify the Massachusetts authority bonds because the garage project—a “light green“ enterprise—is one part of a larger whole.

Green Bonds were originally created to meet environmental mandates of Scandinavian nations’ retirement plans. The World Bank (IBRD) worked with investment banks and a university-based environmental research institute to vet the projects financed with green bonds as issuance began in 2008. As issuance expanded beyond the World Bank and demand grew beyond the initial investors, issuers including private corporations and subnational governments, investment banks, and investors clamored for rubrics and metrics that could be used to certify “green bonds” for their constituents.

Over the past fifteen months, a group of investors developed the Climate Bond Initiative with a focus on the use of proceeds; a group of banks created the Green Bond Principles, a voluntary set of standards for transparency, disclosure, and integrity in issuance; and CERES promulgated a Statement of Investor Expectations for the Green Bond Market. Each of these documents is useful; none has yet achieved universal recognition and adoption—likely an unreasonable expectation.

The head of responsible investing at Zurich Insurance was quoted as saying, “Green is not black and white. Even among climate scientists there is disagreement.” While some may hew to minimal standards and stretch definitions, I do not see the interests of issuers and investors as being in systemic opposition to one another. I expect that over the next few years we will witness refinement of standards and procedures as we finance much needed green infrastructure.

It is useful to calibrate efforts to slow climate disruption and build resilience along continua such as impact, cost, adaptability, appropriateness to context, social equity, and the like. Some green efforts are simple, low-impact, and barely visible—like caulking a window. Others are grand schemes, like the construction of a multi-gigawatt alternative energy generating station. Each contributes in its own way and at its own scale.

Any effort and the investment vehicles that finance such efforts may be as deep green as a bowl of spinach or as light as a Granny Smith apple. It is important to clarify standards so that solid green thinking can be incorporated into the creation of any aspect of the built environment, but in the near term, dismissing projects because they are “light green” does not move the ball forward.

Guest author, Charles Sandmel, is a Portfolio Manager and a member of the portfolio management team responsible for Shelton Capital Management’s fixed income separately managed accounts. He joined Shelton in January 2015 after serving as an Investment Advisor Representative of First Affirmative Financial Network from 1998 to 2014 where he managed bond portfolios for individual and institutional clients, integrating client values into investment decisions. A past Chairman of the Municipal Analysts Group of New York, Mr. Sandmel has been a fixed income portfolio manager for over 25 years.

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: May 6, 2015