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What Makes a Green Bond “Green”?
By Michael Schweibinz

A high level of enthusiasm and optimism flowed through the 25th annual SRI Conference as a panel of experts discussed the past, present, and future of the rapidly emerging green bond market.

The discussion panel consisted of issuers, rating agencies, and investors sharing their own perspectives on the market, its players, impact, and metrics. Speakers and conference attendees all seemed to agree on one point: The green bond market is in a hyper-growth stage, and shows no sign of slowing down.

Henry Shilling, the Senior Vice President of Global Managed Investments at Moody's, kicked off the conversation, explaining how green bond issuances are soaring. Ancillary to this boom has been the amplified demand for Moody’s to produce ratings for this new category of bond.

Shilling gave a preview of what the future may look like, as he described his vision that Moody’s create a new service, a rating scale exclusively for green bonds.

Green bonds serve a somewhat different purpose, as compared to other debt instruments. Green bonds serve as a vehicle to directly invest in specific corporate projects designed to benefit sustainability.

Yet while the purpose may be different, both Shilling and Heike Reichelt of The World Bank, stressed the fact that, “financially, green bonds are just like any other issuance.” The same financial process must be undertaken to evaluate potential projects and returns.

 

Heike Reichelt stated that “there is now over $50 billion in green bonds, and over 60 issuers”—this explosive growth has provided responsible investors with a wide breadth of options that have historically not been available.

So, what makes a green bond green? Well, as explained by Reichelt, a tangible and universal catch phrase just doesn’t seem to work. “Green has a different definition from individual to individual. Thus, transparency is needed in order to keep everyone on a level playing field.”

Reichelt illustrated how the industry’s progression has been strong, but it has been accompanied with growing pains. With such rapid issuances taking place, greenwashing fears have crept to the surface.

Guided by the Green Bond Principles, which emphasize transparency, individual investors can determine if their capital is actually being used to finance desirable and truly green projects.

Greenwashing occurs “when a company or organization spends more time and money claiming to be “green” through advertising and marketing than actually implementing business practices that minimize environmental impact.” The fear is that large corporations are/will issue so called green bonds that are not actually green. They will just slap a green label on a typical debt issuance and rework the fine print.

Clearly, this is a concern that must be addressed. Mel Miller, Chief Economist for First Affirmative Financial Network, articulated in his a recent blog post, “fixed income rating firms like Moody’s need to take the lead.”

He believes that “audit standards are also required to verify the proceeds of a green bond issuance were invested in “certified” green projects. Self-labeled 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: December 3, 2014