With the rapid expansion of sustainability programming over the last decade, companies have been challenged to find ways to finance and measure the return on investment for sustainability projects. Most funded programs have been company or government sponsored. For many years, the lack of measurement for financial performance has kept the investment banking community away from financing these efforts.
In the last six years, a new financial instrument has gained in popularity for funding global sustainability programs. It is called the “Green Bond.” Green bonds work similar to traditional investor bonds given that an investor loans money to an entity for a period of time and at a fixed interest rate. In this case, the funding is used to support environmental and climate oriented programs.
Once considered risky investments, initiatives in climate change, environmental health, and energy now take precedence in a company’s strategy and portfolio. With the advent of the Green Bond, companies and global organizations now have a means for finding funding and qualifying their initiatives.
Green bonds are issued by governments, financial institutions, and companies. Projects selected include those in conservation, transportation, energy efficiency, alternative fuels, solar, wind, and clean drinking water. Development and expansion of infrastructure along with capacity building in third world nations are prime projects for funding.
Green bonds are rated the same way traditional bonds are rated and those issued by the World Bank have AAA standing. Green Bonds have variable durations, anywhere from 3 to 25 years, and several companies have begun laddering the bonds to strengthen their portfolios. Reuters reports that $10 billion was raised in November 2013.
Originally championed by the World Bank and SEB in 2008, Green Bonds have since attracted thirteen major global investment banks. A few of the major investment banks include: Bank of America, JP Morgan Chase, BNP Paribus, HSBC, and Deutsche Bank. The investment banking community has taken a deep interest in the industry over the last two years and supports the potential of high-growth in the sector.
The issuing of Green Bonds is aligned with selection criteria and funding protocols created by the consortium of issuing investment banks. The selection criteria and funding protocols documented are known as the Green Bond Principles (GBP.) All initiatives must comply with the principles in order to receive consideration and funding.
According to JP Morgan, http://www.jpmorganchase.com/corporate-responsibility/green-bonds “… the most common issuers have been supranational organizations such as the European Investment Bank (EIB), the International Bank for Reconstruction and Development (IRBD) and the International Finance Corporation (IFC). However, in 2013 the Commonwealth of Massachusetts issued the first municipal Green Bond, and the largest Green Bonds to date were issued by a corporation, Électricité de France (EDF), which printed a €1.4 billion transaction, and EIB, which continues to tap their benchmark Green Bond which today is € 1.5 billion outstanding. ” JP Morgan is a key contributor to developing the Green Bond Principles and works with the international investment community to align investments to the principles.
The principles consist of four categories which take account of: the use of proceeds, the valuation and selection of the project, the management proceeds, and reporting of status. Of the four principles, the criteria for evaluating new projects appears to be what attracts new investors the most. This principle is most challenging because the selected criteria has not been fully defined and relies on other programs that provide climate change solutions, such as the Climate Bond Taxonomy Project and the Climate Bond Initiative.
As stated by the Climate Bond Taxonomy Project website, the project “aims to provide guidelines for prospective climate bond and green bond issuers and investors about goods and services essential to that rapid transition to a low-carbon and climate resilient economy.” The organization’s goal is to assure investors that the projects selected within the bond funds have significant impact and that programs align with climate science and leading intergovernmental panels.
In addition to the four categories, there is a six part, multi-tiered governance framework that outlines the principles, purpose, structure, members, observers, and executive and drafting committee, as well as the secretariat. Annual, regular, and special meeting guidelines have also been outlined and membership to the committee is based on organizations that either issued, invested, or have underwritten Green Bonds.
According to Ceres, http://www.ceres.org/resources/reports/green-bond-principles-2014-voluntary-process-guidelines-for-issuing-green-bonds/view “The Green Bond Principles (GBP) are voluntary process guidelines that recommend transparency and disclosure and promote integrity in the development of the Green Bond market by clarifying the approach for issuance of a Green Bond. The GBP are intended for broad use by the market: they provide issuers guidance on the key components involved in launching a credible Green Bond; they aid investors by ensuring availability of information necessary to evaluate the environmental impact of their Green Bond investments; and they assist underwriters by moving the market towards standard disclosures which will facilitate transactions.” Ceres plays a role in directing much of the private sector on how to leverage green bonds.
The future of Green Bonds is yet to be determined but all signs point to expansive growth as companies, countries, and governments begin to tackle environmental, social, and climate change issues on a global scale. As buyers become aware of the opportunity and clear benefits are explained to the market, we can expect Green Bonds to become a common way of financing these efforts. As standards become available and evolve, data and ratings will stabilize. Sustainability will become standardized operating procedure for corporations when access to funding, financial performance analysis, and global impact reporting are executed by all.
Bio:
Kelly Eisenhardt is Co-Founder and Managing Director at BlueCircle Advisors, an environmental compliance and sustainability consulting and training firm based in Massachusetts (www.bluecircleadvisors.com.) In her role at BlueCircle Advisors, she is responsible for providing business intelligence, strategy and implementation of environmental, social and governance (ESG) risk programs. Her experience aligns well with her client’s needs for technology, compliance, and sustainability expertise by helping companies create and manage their corporate environmental and social responsibility programs.
To contact Kelly Eisenhardt, send emails to kelly.eisenhardt@bluecircleadvisors.com or follow her on Twitter @KelEisenhardt. For more information about BlueCircle Advisors and the company’s products and services, please visit www.bluecircleadvisors.com, on Facebook at BlueCircle Advisors, on Twitter @OurBlueCircle, and on the LinkedIn group at the BlueCircle Advisors group.