Going green: considerations for green bond issuers.

• Author: Kim, Mark T.

The green bond market has grown dramatically over the past few years, and many public-sector issuers are considering whether they should be "going green" by issuing green bonds. In the simplest terms, green bonds raise capital for projects that have environmental benefits. There is no universally accepted definition of a green bond, however, and in many respects, green bonds are no different than the traditional bonds that many state and local governments and non-profits issue to fund their capital programs. There has been confusion in this market because issuers must decide for themselves whether to label their bonds green, and investors have their own investment guidelines on green bonds. In addition, there is no body that sets standards to establish uniform criteria for monitoring and reporting on the use of green bond proceeds and environmental outcomes, which only contributes to the confusion. This article presents a brief history of the green bond market, followed by a cost-benefit analysis of issuing green bonds and a summary of current best practices.

MARKET HISTORY

The green bond market began in Europe with multilateral development banks and governments. The European Investment Bank is generally credited with pioneering the first type of green bond with its Climate Awareness Bond in 2007, which was followed by the World Bank's inaugural Green Bond in 2008. Issuance volume in the green bond market began to grow significantly in 2013 with the first corporate green bond, by the French electric utility company EDF, and the first municipal green bond in the United States, by the Commonwealth of Massachusetts. By 2014, green bond issuance totaled approximately $36.6 billion, including increased momentum with U.S. municipal issuers, which accounted for $2.8 billion of the total. (See Exhibit 1.) The pace of green bond issuance has slowed in 2015--to approximately $25.6 billion as of September--but is projected to be similar in total volume to 2014's record-setting year.

COST-BENEFIT ANALYSIS

Issuers should carefully consider the potential risks and rewards of issuing green bonds by undertaking a cost-benefit analysis. The most commonly cited potential benefits of issuing green bonds are investor diversification, public relations, and the cost of funds.

Investor Diversification. Green bonds may present an opportunity for issuers to diversify their investor base and improve market access. In 2005, the United Nations convened a group of the world's largest institutional investors to develop what are now known as the Principles for Responsible Investment (PRI). Today, there are...