Given the importance placed on halting the detrimental effects of climate change evidenced by the Paris Agreement, the global demand for green capital and sustainability has risen dramatically and it will not slow down any time soon. Green bonds offer a financial tool for companies to strengthen corporate sustainability and for investors to direct capital into environmentally conscious investments. By definition, green bonds consist of any type of bond instrument in which the proceeds of the bond are directed towards green projects, including renewable energy, energy efficiency, and pollution control. Corporations have used the green bond market to fund a host of environmental projects, but their adoption of green bonds as a mainstream financial instrument has been slow. In many instances, additional expenses and unfamiliarity with the green bond issuance process have discouraged many corporate issuers from entering the space. But this shouldn’t be the case. The long-term consequences of climate change call for immediate action on the part of all businesses, regardless of industry. As a financial tool for environmental change, green bonds can accelerate the transition to a sustainable economy.
Although several headwinds confront the market, the benefits of green bond issuance far outweigh the costs. First, companies can substantially expand their investor base by issuing green securities. Green bond issuances from companies like Apple and Southern Power Co. have been highly oversubscribed by a green investor base seeking stable financial returns with the added environmental benefit. Companies that capitalize on this investor demand can tap into a new segment of the debt markets to expand their access to low-cost financing for green projects. Second, given the political support for renewables and energy efficiency, companies can monetize substantial tax benefits by moving into these industries. Green bonds offer a mechanism for businesses to obtain financing for projects that take advantage of the federal investment and production tax credits for renewable energy technologies and property assessed clean energy (PACE) financing for energy efficiency retrofits. Third, a green premium, although not explicitly priced into the bond, is often paid for access to green securities. Thus companies that issue green bonds can obtain highly favorable financing terms for their debt issuance given the underlying green objective of the bond. Finally, green bonds offer an extraordinary marketing opportunity for companies aiming to promote their corporate sustainability efforts. As shareholders demand an increased focus on carbon footprint reductions, corporations can both issue and invest in green bonds to show their commitment to environmental objectives. Traditional issuers of green bonds, such as multilateral development banks, inherently green corporations, or anyone who is directly tied to the energy sector or traditionally invests in the energy space, have played an important role in the growth of the market. However, non-traditional players without inherent ties to the energy sector are well-positioned to take the green bond market into the financial mainstream.
The entrance of more corporate issuers into the green bond market can create a positive feedback cycle among issuers and investors, driving growth in the market. This positive feedback cycle occurs as more non-traditional corporate issuers spur investor demand for highly-rated, environmental-conscious corporate debt. The expansion of this investor demand in return drives more corporates to enter the market to access the growing supply of green capital. More corporate participation can continue to drive investor demand as the green bond market grows. In addition to this feedback cycle, political support for green objectives can accelerate the growth of the market. As the investment and production tax credits phase down, federal support could be reallocated to tax-advantaged corporate green bonds, which is not far-fetched given the tax-exempt status of many municipal bonds. Although introducing tax-advantaged bonds requires a detailed legislative process, these green bonds would be a major spark for the market.
Green bonds provide a financial mechanism for corporate issuers and investors to both achieve sustainability goals and realize predictable financial returns. Corporate issuers are crucial to the future of the green bond market, creating the perfect storm of corporate sustainability and capital flow into environmental objectives. This link between corporate and financial green objectives is the catalyst that will create a sustainable future.
To read the full study, see here: http://acore.org/images/documents/GreenBonds_ACORE.pdf