Who is to define the ‘green’ in a green bond?
By Community Capital Management, Co-Portfolio Manager (Impact Fixed Income) of the AdvisorShares Global Echo ETF (NYSE Arca: GIVE)
Over the last couple of years, we have heard an awful lot about green bonds. They are attracting all types of investors and everyone seems to be on the environmentally friendly bandwagon. According to the Climate Bonds Initiative, the total amount of outstanding green bonds in 2014 was $53.2 billion. This figure, however, only includes what’s known as labeled green bonds. Who is to define if a bond is labeled ‘green’? Good question. Here is the answer…any debt issuer can label its bonds green. It is an unregulated term. Even with the launch of the Green Bond Principles aimed at standardizing practices for issuers and investors, there still seems to be unrest. Now you are probably more confused with green bonds than you were before. Our apologies. We hope reading on will help solve this quandary.
What the Climate Bonds data does not include is the number of bonds financing projects, initiatives, housing or even small businesses that have a green benefit. For example, a municipal bond funding the construction of a facility for the manufacture of wind turbines. What is greener than that? Or a small business that offers recycling services. Who says that’s not green? We feel it all boils down to analyzing the bond’s use of proceeds which investors can then use to determine if it meets their definition of green. Not a debt issuer’s arbitrary assignment. Not a government’s decision. It is the investor’s call. They have the final decision.
Last week, Morgan Stanley issued its inaugural green bond to help facilitate $500 million in funding for existing and future renewable energy and energy efficiency projects. Ahead of this offering, they created a green bond framework that describes the process through which projects are selected to receive funding, with the aim of ensuring that their green bond operates at high levels of transparency, disclosure and verification. They even make reference that there is no standard definition of a green bond and that for information on characteristics of a specific green bond, use of proceeds, a description of applicable projects and/or any other relevant information about the bond can be referenced in the offering documents. We agree with this 100%.
At Community Capital Management, our criteria for green designation includes identifying, recording and tracking the underlying environmental benefit that each transaction will support. The green bond portfolios we manage on behalf of clients are customized based on discussions with the client as to what they consider green and examples of bonds that meet those criteria. Just as you decide what to eat for dinner, how much to spend on a gift for Aunt Mary, or what percentage of your income to save for retirement, you also have the final authority on defining a bond ‘green’.