The market for bonds instruments to pay for environmentally sustainable infrastructure projects is more than a fad.
Many consumers are trying to help combat climate change, whether it involves recycling, driving energy-efficient vehicles, or supporting sustainable farming. Now many of them are looking to their investment portfolios to do the same.
Green bond issuances—bonds that underwrite sustainable infrastructure projects—are growing rapidly. Last year, government entities and private corporations issued $93.4 billion in green bonds; the amount is expected to top $200 billion in 2017, according to Moody’s Investors Service. That’s a meteoric rise for a category that debuted in 2007 and had fewer than $5 billion in issuances as of 2012. Many American cities, including Seattle, Cleveland, Washington, D.C., and St. Paul, Minnesota, have also issued green bonds for projects primarily targeting transportation and water quality.
The concept is gaining popularity with issuers as well as investors who choose green-bond investments for their social and environmental benefits and high rates of return.
“There’s upside potential here because green bonds allow investors to show how they’re playing their part. That has real value from a community perspective,” says Cary Jones, Senior Vice President, Corporate Trust & Escrow Strategist at Regions.
The Green Premium
Indeed, investors are eager to buy green bonds: A 2015 Barclays report indicated investors were paying 20 additional basis points to acquire green bonds on the secondary market. The premium, which results in lower costs to the issuer, helps to explain why issuers are embracing the new segment.
“Anything that can lower your cost of borrowing is a good thing,” says Julz Burgess, Senior Vice President and Head of Corporate Trust at Regions. “Lowering the cost of borrowing for municipalities is an important part of its overall financial management. Municipalities are always looking for ways to bring improvements to their constituencies on economically feasible terms, and green bonds have been helpful in that regard.”
Green bonds have caught on with U.S. corporations and municipalities alike. In 2016, tech giant Apple issued $1.5 billion in green bonds to finance clean-energy projects throughout its global operations. The Seattle Transit Authority issued $923 million in green bonds in 2015.
Not All That Is Green Glitters
However, hurdles remain. For instance, the International Capital Market Association’s Green Bond Principles is generally considered the industry standard, but some bonds that call themselves green fall short of the ICMA guidelines.
With close to $36 billion in green bond issuances last year, China was home to the world’s largest green bond marketplace in 2016, but one-third of those bonds failed to meet the Green Bond Principles standard. Those were issued under a more lax Chinese guideline, according to a report co-sponsored by the Climate Bonds Initiative and the China Central Depository and Clearing Co., which operates the Chinese treasury bond depository system.
And if the United States pulls out of the multinational Paris climate accord—part of President Donald Trump’s campaign platform—it could stall green bond market growth. Should the U.S. relax environmental regulations as a result, it’s possible that fewer American corporations and municipalities will pursue eco-friendly projects.
Even with those obstacles, it appears that the green bonds will flourish. Moody’s has predicted another year of 120% growth in the global green bond market—a coming-of-age for a fast-growing new bond segment.
