Green Greed is Good: How Green Bonds Cultivated into Wall Street's Environmental Paradox

Author:Luke Trompeter
Position:JD/MBA Candidate, American University, Washington College of Law, 2019; B.A. Political Science, B.S. Business Administration, University at Buffalo (SUNY), 2015. I would like to thank Professor Hunter as well as the editors and staff of the Sustainable Development Law and Policy Brief for all your help. A special thank you to my parents for...
4Sustainable Development Law & Policy
Green GreeD iS GooD: how Green bonDS
cultivateD into wall StreetS
environmental paraDox
Luke Trompeter*
When the European Investment Bank issued the first
green bond in 2007, few imagined this debt instru-
ment would attract mainstream investors. Designed to
finance projects ranging from climate change prevention to clean
transportation development, green bonds were geared for socially
responsible investors concerned with our planet’s sustainability.
However, by 2015, green bonds were issued by major corpora-
tions like Apple and municipalities like New York City at a record
$40 billion. Major players on Wall Street have taken notice and
look to cash in on the rapidly growing green bond market. With
this new influx of investment and the bonds’ tax-exempt status,
clear standards for what constitutes a “green” project are required
to ensure investors’ money is actually being used to increase envi-
ronmental protection and sustainable development.
This Comment discusses how green bonds were first cre-
ated, their original purposes, and how they grew into a main-
stream investment tool. Since the demand for these bonds
exploded, there remains very few regulations ensuring these
investments will be used for “green” projects. The Securities
and Exchange Commission (“SEC”), Environmental Protection
Agency (“EPA”), and the Municipal Securities Rulemaking
Board (“MSRB”) are best suited to provide clear definitions and
disclosure laws for green bond projects, giving issuers clarity,
and ensuring investors that their funds are being properly used
for environmental and sustainable development.
I. IntroductIon
Al Gore famously stated on the threat of climate change,
“[t]he good news is, we have everything we need now to respond
to the challenge of global warming . . . But we should not wait,
we cannot wait, we must not wait.1 In the early 2000s, the inter-
national community was uncertain on how best to address cli-
mate change and ensure the world’s increasing development was
sustainable.2 In 2008, the World Bank launched the “Strategic
Framework for Development and Climate Change” to jump-start
public and private sector action against climate change.3 Included
in these proposals was the issuance of “Green Bonds,” an inno-
vative method of encouraging investment in environmental and
sustainable development projects across the globe.4 Green bonds
have since grown from a socially responsible investment niche
to a major Wall Street debt instrument, reaching $40 billion in
issuance in 2015.5
Green Bonds are currently being used to finance projects in
climate change prevention, biodiversity conservation, pollution
reduction, renewable energy advancement, clean transportation
development, and clean water projects.6 Green Bonds are given
tax-exempt status to incentivize issuers who then supply inves-
tors with AAA credit ratings.7 Governments at the national, state,
and local levels allow these bonds to be issued tax-free because
of the positive environmental returns they produce in fighting
climate change.8 Given these tax exemptions, many have con-
cerns that the lack of a clear definition of a “green project” and
minimal disclosure laws will allow new players to issue bonds
without ensuring their projects have beneficial environmental or
sustainable impacts.9
This article will begin by focusing on how the European
Investment Bank and the World Bank f irst created green bonds
in 2007. It will address how after the International Finance
Corporation (“IFC”) sold the first $1 billion green bond,10 the
rest of the market took notice, and the industry has grown to
$40 billion with new issuers entering the market including
municipalities and corporations.11 Since the demand and supply
of these green bonds exploded, there remain very few rules pre-
venting “greenwashing” from saturating the industry and ensur-
ing issuers use the investments for substantive green purposes.12
In response, the private sector crafted voluntary regulations for
issuers known as the Green Bond Principles.13
Part III of this article will analyze the liabilities of volun-
tary prescription in the industry. Due to the lack of a definitive
verification process, American municipal bonds are particularly
vulnerable to investment in unhelpful green projects.14 New laws
and regulations may turn off some investors hoping to cash in
on the tax-exempt investment grade bonds.15 Both issuers and
recipients of the bonds will need to decide whether they care
more about making green or being green. Part III of this article
will also outline how investors in green bonds can use class
action lawsuits to sue issuers who mislead them or greenwash
their projects for non-sustainable purposes.
Part IV of this article will recommend definitive solutions
for the green bond industry. First, the Securities and Exchange
Commission (“SEC”) and the Environmental Protection Agency
(“EPA”), through cooperative action, should issue a conclusive
* JD/MBA Candidate, American University, Washington College of Law, 2019;
B.A. Political Science, B.S. Business Administration, University at Buffalo
(SUNY), 2015. I would like to thank Professor Hunter as well as the editors and
staff of the Sustainable Development Law and Policy Brief for all your help. A
special thank you to my parents for always supporting and motivating me.
5Spring 2017
definition of what a “green project” is. Second, the Municipal
Securities Rulemaking Board (“MSRB”) should increase its
disclosure laws for municipal issuers of green bonds. Third,
allowing class action lawsuits by investors whose money is used
for greenwashing will establish legal precedent for the misuse of
green bonds and ensure that violators are held accountable.
II. the evolutIon of Green bonds from tree
huGGer to WAll street mIstress
a. what makeS a bonD Green?
A bond is a debt instrument issued to a holder.16 In other
words, a legal IOU or loan, where the holder lends the issuer
money with interest.17 The issuer uses these funds to finance
continuing investments that will return profits for both the issuer
and the holder.18 Currently, corporations lead bond issuance with
over $7.5 trillion, while municipal bonds account for another
$2.9 trillion.19 Green Bonds, similar to social impact bonds,20
are “theme bonds,” meaning they have a designated goal for the
investment.21 In this case, mitigating climate change or investing
in sustainable development.22
Currently, there are four major types of green bonds—
although others may emerge as the market grows and diversi-
fies.23 The first, Green Use of Proceeds Bonds, are much like
conventional bonds, in which issuers raise capital and repay their
investors with interest over time with proceeds from the invest-
ment project.24 The credit ratings for Green Use of Proceeds
Bonds are the same for the issuer and the actual bond.25 The sec-
ond type of green bonds, Green Use of Proceeds Revenue Bonds,
pays its investors back through guaranteed revenue streams such
as fees, tolls, or taxes.26 The third type, Green Project Bonds,
finance projects in which the investor has direct exposure to the
risk of project and may not have recourse to the issuer.27 Lastly,
Green Securitized Bonds finance projects and use underlying
assets as collateral.28 These assets typically generate the first
repayments to bondholders.29
Green bonds are being used to finance projects in pollu-
tion prevention, clean transportation technologies, renewable
energy (solar, wind etc.), clean water, biodiversity conservation,
carbon reduction, and sustainable construction that adhere to
LEED30 certification standards.31 For example, the World Bank
has funded solar and hydro power projects in China, geothermal
projects in Indonesia, efficient lighting projects in Mexico, sus-
tainable rail transit in Brazil, eco-buses in the Philippines, water
purity plants in the Dominican Republic, solid waste develop-
ment in Morocco, eco-farming in Armenia, agricultural innova-
tion studies in Peru, and climate resilient infrastructure plans32
across multiple nations.33
Green Bonds are particularly attractive to potential inves-
tors because they are tax exempt34 providing fiscal incentives
to aid in the fight against climate change or develop renewable
energy.35 Additionally, these bonds have an investment grade
which entice not only socially-responsible investors (“SRIs”),
but also mainstream investors looking for safe places to put their
money.36 SRIs typically do not invest in regular bonds, prefer-
ring instead to select investments they feel will have long-term
socially-beneficial impacts.37 SRIs who invest in green bonds
value their environmental benefits, and issuers can diversify
their investor pool with SRI funds normally not available to
them.38 The World Bank guaranteed the f irst green bonds with
AAA rating, the highest any investment can receive.39 This
meant potential investors were almost guaranteed their invest-
ment would not default.40 With the entrance of new corporate
and municipal issuers, the ratings on some bonds have declined,
but none have been issued lower than Standard and Poor’s invest-
ment grade BBB rating.41 Currently, the green bond market is
oversubscribed, meaning investor demand exceeded that of the
shares available.42
b. Green bonDS: an oriGin Story
The European Investment Bank (“EIB”) issued the first
green bond in 2007 to fund renewable energy projects across
Europe.43 The World Bank has subsequently taken the lead as
the global issuer of Green Bonds by financing climate-related
projects across the globe.44 In 2008, the World Bank published
an outline “Strategic Framework for Development and Climate
Change”45 to stimulate public and private sector action in the
fight against climate change and to promote the use of renew-
able energy.46 Green Bonds emerged as a significant tool for the
World Bank to accomplish its goals.47 By raising funds from
investors, the World Bank can lend money for projects that edu-
cate and help developing nations combat the consequences of
climate change.48 Since 2008, the World Bank has issued over $9
billion in green bonds in over 120 dealings.49
In March 2013, the IFC,50 issued the first $1 billion green
bond, which completely sold out to investors within an hour of
issuance.51 The rest of the bond market, including major players
like corporations, central banks, investment banks, and munici-
palities, noticed this new financial product and the seemingly
unlimited demand for it.52 Months later, the Environmental
Defense Fund (“EDF”), Bank of America, and Vasakronan (a
Swedish real estate company) issued the first corporate green
bond.53 After the entrance of corporate issuers into the market,
both the popularity and availability of green bonds increased.54
Corporate issuers have exponentially more capital available to
them than development banks, and sell their products on major
exchanges across the world.55
The Commonwealth of Massachusetts issued the first green
municipal bond in June 2013.56 The bond was issued at $100
million, and the state received over $130 million in offers from
183 investors.57 Recognizing the success of Massachusetts’
green bonds, the New York City Comptroller proposed a plan
to issue $30 billion in green bonds by 2018, making it the first
city in the country to offer bonds that specifically finance envi-
ronmental projects.58 The New York City Comptroller’s office,
in conjunction with the Office of Management and Budget, was
charged with establishing the criteria for what constitutes a green
project using previous issuers like the World Bank and IFC as
models.59 The Comptroller’s Off ice sought feedback from inves-
tors on how best to establish a high quality green bond program
in an effort to be transparent and to highlight New York City’s
dedication to sustainability.60
6Sustainable Development Law & Policy
Once corporate issuers like Vasakronan, and municipal issu-
ers like New York City, entered the green bond market, billions
flowed in, and the number of issuers dramatically increased.61
c. a private Sector reSponSe: the Green
bonD principleS
In the early stages of the green bond market, issuers like the
IFC and the World Bank were trusted to only finance projects
that were in accordance with the World Bank’s rigorous environ-
mental and social safeguard policies.62 However, as more cor-
porate and municipal issuers enter the market, legal regulations
will play an important role in ensuring the bonds are actually
used to address environmental challenges.63
There are two main concerns those in the green bond industry
have going forward which include the lack of consensus regarding
what constitutes a green-bond-eligible project and weak transpar-
ency and reporting requirements.64 The industry is currently at a
crossroads; it must establish definitions for what a “green project”
is, and require issuers to disclose and verify the use of their tax-
exempt bonds, or allow projects to be diluted by greenwashing.65
When companies66 or government organizations promote
environmental initiatives, but actually operate in a non-envi-
ronmentally responsible way, it is labeled g reenwashing.67 For
example, energy companies greenwash when they tout green
energy technology even though compared to fossil fuels, it
represents only a small proportion of their overall business rev-
enue.68 In the green bond context, issuers may advertise their
projects as green to entice investors and reap tax benefits, but
actually use the funds for environmentally detrimental proj-
ects.69 For example, clean coal projects, which have become
the poster child for greenwashing, advertise themselves as 70%
cleaner than traditional coal, but scientists have maintained this
has no reduction on climate-change-causing carbon emissions.70
Additionally, under current disclosure requirements, bond inves-
tors may not be aware that the project they helped finance has
been greenwashed until after its completion.71 For instance, a
hydroelectric dam may produce more greenhouse gases than it
reduces and may yield other conservation concerns.72
The International Capital Market Association (“ICMA”)
established the Green Bond Principles (“GBP”) in 2014 as a
private sector solution to green bond disclosure and verifica-
tion.73 The GBP have four core components: Use of Proceeds;
Process for Project Evaluation and Selection; Management of
Proceeds; and Reporting.74 The GBP recognizes nine broad
categories that are eligible for green bond issuance:75 1) renew-
able energy including production, transmission, and products;
2) energy efficiency and energy storage in new and refurbished
buildings and smart grids; 3) pollution prevention greenhouse
gas control and soil remediation; 4) sustainable management
of living natural resources including sustainable agriculture
and fisheries; 5) terrestrial biodiversity conservation including
the protection of coastal and watershed environments; 6) clean
transportation such as electric or hybrid public rail; 7) sustain-
able water management including clean drinking water and sus-
tainable urban drainage systems; 8) climate change adaptation
including climate observation and early warning systems; and
9) eco-efficient processes such as eco-labeling and resource effi-
cient packaging and distribution.76
Currently, many issuers in the industry subscribe to the
voluntary GBP.77 While the GBP are beneficial for recommend-
ing the use of proceeds, providing environmental assessments,
and reporting stipulations for projects, further requirements are
needed before they can be considered comprehensive guidelines
for green bonds.78
III. beInG Green WhIle mAkInG Green:
AnAlyzInG the reGulAtory clImAte
of Green bonds
a. examininG voluntary preScription of Green
bonD GuiDelineS
The green bond market has grown exponentially in the last
few years, but the deficiency of regulation in the industry could
hinder the bonds’ ability to generate substantial environmental
progress.79 While many issuers currently subscribe to the vol-
untary GBP established by the ICMA,80 there are problems with
enforcing these voluntary principles. Some of the problems
include the lack of accountability and enforcement mechanisms
coupled with minimal disclosure requirements and the absence
of penalties for violators.81
The ICMA believes the use of proceeds, project evalu-
ation, management of proceeds, and reporting requirements
established by the GBP promote transparency and disclosure
for investors and banks.82 While these principles can be helpful,
they remain voluntary.83 Further, the ICMA is a trade associa-
tion and represents issuers and asset managers that subscribe to a
self-regulating market system.84 With the exponential increase in
green bond issuance and the entrance of municipal and corporate
entities into the market, the voluntary system is not enough.85
Unified government regulations are needed for clear definitions
of “green” and to prevent a flood of greenwashing projects.86
The GBP purposely do not take a stand on which green proj-
ects or technologies will produce the greatest environmental or
sustainable benefits.87 This is problematic as issuers can receive
the same tax benefits without guaranteeing substantial results.88
While difficult, it is possible to calculate the anticipated results
or environmental externalities of potential green bond projects.89
The GBP also recommend the use of an external reviewer
to verify the sustainable features of a potential project.90 Again,
this verification is voluntary, and the GBP note that external
party reporting adds costs that do not occur with regular bonds
and could potentially limit investor funds.91 Additionally, issu-
ers who do choose to use an external review may do so from
“second-party opinions,” which can sometimes be from the
same organization that issued the bond while still claiming it as
an independent opinion.92 Even true, third-party reviewers like
Moody’s93 may have a conflict of interest with issuers if they
are paid based on the quality of the assessment they provide.94
Moody’s and other major credit rating agencies were accosted
for their role in the 2008 financial crisis.95 This included the use
of an “issuer pay” model, where the issuer pays the agency for
7Spring 2017
each rating, which may influence the agency to give out higher
ratings or risk losing business to competitors.96 The same prob-
lems could persist with verification of green bonds if issuers
voluntarily choose their external reviewer.97
The Climate Bond Initiative (“CBI”) recognized the problems
of the “broad integrity principles” set forth in the GBP.98 In devel-
oping the Climate Bonds Standard & Certification Scheme, the
CBI established mandatory requirements for tracking and report-
ing as well as an assurance framework with independent verifi-
ers.99 Complying with the Climate Bond Standard enables a bond
to be certified, allowing investors to be more certain their funds
will be used to produce environmental or sustainable benefits.100
While the Climate Bond Standard is an improvement for
the green bonds market, it still has several shortcomings. The
requirements within the Climate Bond Standard are mandatory,
but subscribing to the Climate Bond Standard remains volun-
tary.101 Given the additional costs of verifying, many issuers will
avoid this process and still enjoy the tax benefits.102
Like the GBP, the Climate Bond Standard does not provide
a clear definition of what is considered a “green” project or
technology.103 The Climate Bond Standard provides broad cat-
egories of commonly invested ventures, but in aligning itself
with the requirements of GBP, the Climate Bond Standard
purposely does not take a position on which eligible green
projects would produce the optimal environmental results.104
Common examples of this dilemma include nuclear power,
which is considered green as a renewable resource but a hazard
in a conservation effort.105 Another concern is the funding of
“clean coal” projects, which remains banned under the Climate
Bond Standard but may be allowed under less restrictive guide-
lines.106 Financing water projects has also become a source
of disagreement in the green bond industry.107 While there is
undoubtedly a need for funding of water infrastructure proj-
ects, expensive water treatment and desalination processes may
force cities to use massive amounts of carbon-based energy.108
Therefore, many in the industry argue that water infrastructure
projects should not be eligible for green bonds.109 The CBI
released the Water Climate Bonds Standard in 2015 to address
this dilemma and help investors evaluate water-related projects
and their anticipated environmental impact.110 Issuers have
since adapted the Water Climate Bonds Standards, but due to
its novelty, the effectiveness of the standards at curbing envi-
ronmental and sustainability concerns has yet to be seen.111
Providing tax incentives for projects that are greenwashed
and fail to produce the projected environmental results is the
strongest argument for establishing a government mandated
“green” definition as issuers are reaping the benef its without
contributing to the public good.112 Relying on voluntary mar-
ket principles might help issuers increase the number of bonds
through lower issuance costs, but this will ultimately be detri-
mental for the intended environmental cause.113 Once the market
loses credibility through greenwashing, it may never recover.114
A conclusive definition of “green” by the government would
allow issuers to better demonstrate that their project is focused
on credible environmental change while assuring investors
that their funds are being used properly.115 The U.S. Food and
Drug Administration (“FDA”), in conjunction with the U.S.
Department of Agriculture (“USDA”), underwent a similar pro-
cess when deciding upon a definition for “organic” food label-
ing.116 To draft this definition, the USDA used studies of organic
production and requested comments from industry participants
including farmers and producers to evaluate criteria.117 This
enabled the USDA to create a definition that could be regulated,
complied with, and would not unreasonably increase costs of
organic production.118 To be considered “organic” the food must
meet several requirements including production without genetic
engineering or ionizing radiation, production per the National
List of Allowed and Prohibited Substances, and certification by
the authorized USDA National Organic Program.119 While you
can label particular ingredients as organic on the side informa-
tion panel without this certification, it is illegal to label organic
on the primary display section or use the USDA organic seal
anywhere on the package without it.120
Similarly, the government could provide a clear definition
of “green projects,” specify requirements to satisfy this defini-
tion, and develop a certification process that would signal to the
public the bond’s green authenticity.121 As the primary securities
regulator in the country, the SEC122 is best positioned to work in
conjunction with the EPA, who already has precedent for creating
definitions of green infrastructure.123 The SEC and EPA could
request comments from respectable green bond issuers includ-
ing the World Bank to ensure their definition would be effective,
cost efficient, and reasonable to comply with. However, a major
concern for the industry is ensuring regulatory costs do not dry
up the market.124
b. Green metropoliS: muni bonDS aS toolS for
SuStainable chanGe
Municipal bonds are often seen as trusted financial invest-
ments and the best solution to America’s g rowing infrastructure
problem.125 Green municipal bonds attempt to combine the
reliability of the municipal market with the extrinsic benefits
of environmental and sustainable development.126 However,
municipal bonds are particularly ripe for greenwashing and con-
fusion over the designation of green projects.127
While two-thirds of global green bonds received third-party
verification, only two US issued municipal bonds received any
external review, making many doubt their green credibility.128
This has led to concerns that the bonds designated green are fail-
ing to accomplish their desired results while still retaining the
tax benefits.129 In 2015, Julien Bras, a SRI portfolio manager at
Allianz stated:
Without some form of market or regulatory interven-
tion, the risk is that the market is going to end up being
a mixed bag, and then it will never recover its credibil-
ity . . . it’s the easiest way to greenwash—all you have
to do is come up with a couple of environmental proj-
ects, green-stamp them, and pocket the funds allocated
for those projects. It doesn’t cost much more [than a
conventional bond]. . . . The need for [standardization]
8Sustainable Development Law & Policy
on this market is self-evident and urgent—we need a
definition of what is green.130
The private sector has continued to develop solutions to
this issue, but the government has yet to intervene. In August
2016, Moody’s issued its first Green Bond Assessment (“GBA”)
for an American municipal bond.131 GBA scores range from
GB1 (excellent) to GB5 (poor) based on the organizational
structure put in place to manage the bond, the use of proceeds,
the expected disclosure on the use of proceeds, the expected
management of proceeds, and the ongoing reporting and disclo-
sure.132 A GBA is not a credit rating but rather an opinion on the
relative effectiveness of the issuer’s environmental or sustainable
project.133 In offering these assessments, Moody’s is adding to
the competitiveness of the green bond market by enlightening
investors about which bonds will have the greatest environmen-
tal impact.134
While the GBA is a positive step towards validating green
bonds, the same issues arise as the GBP.135 First, the assess-
ment is currently only available to those that request it, meaning
issuers can still avoid the verification process.136 Additionally,
the first municipal bond assessed by Moody’s was for a water
project.137 Sustainable water investments can be considered
green under the GBP, but others in the industry, including many
SRIs, feel they should not be eligible for green bonds.138 Recent
municipal green bonds issued to finance water projects follow
health and safety standards of the Clean Water Act and Safe
Drinking Water Act.139 However, without a clear green defini-
tion, they may fail to consider all the necessary environmental
aspects, such as energy consumption needed to deliver and treat
the clean water.140 The debate over water projects highlights the
lack of consistency across the market as to what should qualify
as a green project and why government action is still necessary
in the green bond market.141
The Municipal Securities Rulemaking Board (“MSRB”) has
a history writing investor protection rules regarding municipal
bonds and ensuring the funds are used in a fair manner.142 The
MSRB is a self-regulatory organization, financed by member dues,
and its rules are enforced by the Financial Industry Regulatory
Authority (“FINRA”)143 and the SEC.144 The Dodd-Frank Act
of 2010 broadened the MSRB’s oversight ability, and mandates
how municipal issuers disclose information to its transparency
system.145 The MSRB currently requires issuers to disclose an
official statement including the underwriting spread, the amount
of any fee received by the dealer, and the initial offering price for
each maturity in the offering whenever there is a new primary
offering of a municipal bond.146 Additionally, issuers must contin-
ually disclose information about the municipal bonds throughout
its maturity.147 Mandatory disclosure rules for municipal green
bond issuers would ensure they are complying with green proj-
ect definitions, and continue to monitor and adhere to the green
requirements throughout the project’s completion.
c. the inveStor StrikeS back: claSS action
lawSuitS aGainSt Green bonD iSSuerS
As in other cases of bond issuer fraud, if a green bond issuer
provides misleading information that investors consider detri-
mental to their investment, legal action should be an available
resolution tactic for them to recover. However, without widely
accepted definitions and standards for green bonds, “it is dif-
ficult to judge whether there has been an extreme departure from
a reasonable standard of care.”148
Although they are a fundamental starting point for a best
practices standard,149 neither the Climate Bond Standard nor the
GBP offer solutions for investors who were wronged by their
issuers.150 Legal action against issuers can help wronged inves-
tors recover damages and act as a deterrence method against
future issuers who greenwash their project or mislead investors.
Class action lawsuits against bond issuers are an established and
effective legal practice that can be dually applied to green bonds
and the greenwashing problem.151
If courts find that issuers of bonds deceived their investors
during the primary offering, or throughout the bond’s maturity,
they will allow individual investors to consolidate their complaints
into one class action lawsuit.152 For example, in Zhu v. UCBH
Holdings, Inc., investors alleged that the corporation issued mate-
rially false and misleading statements concerning UCBH’s busi-
ness condition and hid accumulating loan losses from them.153 The
investors alleged the issuers made these misleading statements to
generate a scheme to defraud them.154 One investor filed a com-
plaint for a securities class action on behalf of “all purchasers of
publicly traded UCBH securities.”155 The Court ruled that it would
allow the complaints from different investors to be conjoined into
a class action lawsuit against the issuer.156
Similarly, if investors of green bonds feel the issuer made
false or misleading statements about the environmental impact
of the investment, they should be allowed to consolidate their
claims against the issuer into a class action suit.157 Allowing
investors to do so levels the playing field between individuals
and multi-million dollar entities like corporations of municipali-
ties.158 Members of a class action suit can combine resources,
legal services, and any evidence they may hold against the
defendant.159 Without class action suits, investors may not have
the financial incentive to fight against large green bond issuers
like Apple.160 Additionally, issuers have incentive to continue
their deceptive behavior if they are not confronted by bondholder
litigation.161 However, due to its complexities, class action liti-
gation is a lengthy process.162 Bondholders looking for a quick
reimbursement of their funds may be better served resolving
their cases individually.
Once a class action suit is formed, courts have ruled that
issuers who fail to follow their publicly stated plans for an invest-
ment can be petitioned to pay damages to their investors.163 For
example, bondholders in In re Oppenheimer Rochester Funds
sued an issuer for failure to adhere to the Fund’s stated invest-
ment objective and over-concentration of the Fund’s assets in
non-investment grade (or “junk”) bonds.164 The investors alleged
the fund managers promoted the investment as high yield with
9Spring 2017
tax-free interest income from municipal bond portfolios, which
would be carefully assessed and monitored.165 In reality, the
fund was heavily concentrated with junk bonds, a much riskier
and volatile investment.166 Using evidence from testimonies,
offering documents, and board meeting minutes, the plaintiffs
established that they did not know, and through the use of rea-
sonable care could not have known, that the defendant’s state-
ments were false or misleading.167 Given the similar arguments
and evidence of all the plaintiffs, the court ruled that no other
avenue of resolution would be applicable and allowed the case
to continue as a class action.168 The case settled out of court but
proved significant for bondholders who are misled by issuers.169
Investors in green bonds can use this precedent against issuers
who fail to adhere to their original green investment objectives
or switch their project plans throughout a bond’s maturity.170
Contrarily, there are cases of precedence for issuers win-
ning or dismissing class action lawsuits by investors. Without
a clear definition of “green projects,” the bar for investors to
prove issuers mislead and deviate from their original green
objectives is high.171 Bondholders in Abell v. Potomac Ins. Co.
sued an issuer and underwriter for misleading statements about
the project they invested in.172 Although the bondholders won
the suit and were able to prove the defendant’s statements were
materially false, the class action damages were reversed, and
the bondholders were not compensated because they failed to
prove that they had relied on these statements to make their
investment decisions.173 The Court ruled that the plaintiff’s
reliance on a securities fraud action is subjective and requires
each individual investor to prove that she based her decision on
the defendant’s misstatements or omissions.174 Determination
of materiality, on the other hand, requires the plaintiffs to
demonstrate how a reasonable investor would have used the
defendant’s statements—a much easier burden.175 The decision
in Abell v. Potomac Ins. Co. highlights the risk investors face
when choosing to take action against an issuer.176
The burden for investors is high, but establishing legal prec-
edent for green bondholders against issuers who mislead them
or greenwash their projects will bring transparency and ensure
integrity remains in the market. Settlements mandated by securi-
ties class actions are publicly posted to aid other investors who
may bring future suits.177 As precedent, when environmental
class action lawsuits were publicized, corporations were forced
to change their pollution habits and compensate affected class
members.178 If green bond investors can succeed in future land-
slide cases, issuers will change their practices for fear of finan-
cial repercussions and public shame.179
Iv. solutIons for Green solutIons:
ProGressInG reGulAtIon And leGAl ActIon
In the Green bond mArket
a. fifty ShaDeS of Green: DevelopinG conSiStent
Green DefinitionS
While the guidelines of the GBP, the Climate Bond
Standard, and Moody’s GBA are helpful, there remains little
consistency in the green bond verification process.180 Different
standards allow for different definitions of green projects—
leading to different “shades” or effectiveness of green proj-
ects.181 This blurring of what constitutes “green” opens the
door for issuers to greenwash projects while benefiting finan-
cially from their tax-exempt status.182 Issuers looking to cash
in will saturate the market with greenwashed projects, SRIs
will stop investing in projects they feel are not impactful, and
the market will dry up.183 If the green bond market is to remain
robust and effective in its environmental and sustainability
efforts, a consistent definition of “green” is required.184
The SEC, which regulates the securities industry, including
the bond market, is best equipped to enforce definitions of what
constitutes a green project against issuers in the market.185 In
defining what is considered “organic,” the FDA worked con-
junctively with the USDA.186 Together, the two government
agencies were able to agree upon a definition, requirements to
meet that definition, and how best to enforce it.187 Similarly, the
SEC should work with the EPA, who is more knowledgeable in
environmental issues and sustainable development.
Balancing the “green” interests of renewable resources ver-
sus conservation efforts will be difficult, but it is an important
step in ensuring green bonds achieve their original purpose. The
EPA will likely decide what qualifies, as it has a regulatory his-
tory defining green infrastructure, as a similar “cost-effective,
resilient approach to managing . . . impacts that provides many
community benefits.”188 The EPA published handbooks for local
governments to grow green infrastructure,189 and therefore can
publish similar literature for issuers and investors when defining
green bonds.
The EPA and SEC should request comments from issuers
who have a history defining and verifying green bonds to discuss
effective methods.190 This will ensure the definition would be
both controlled and cost efficient.191 Additionally, the SEC will
enforce this definition using its authority in the securities market
to not allow issuers to label their bonds “green” unless they sat-
isfy the EPA definition.192 Issuers that meet this definition will
be eligible for the certification and can advertise their bonds as
EPA/SEC approved “green” bonds.193
Requirements should be included in order to meet the defi-
nition and qualify for the certification. This definition can model
the GBP,194 but it should also weigh the environmental impacts
of one project classification versus another. Eligible categories
will be chosen based on main areas of environment and sustain-
ability concerns that require financing.195
To date, typical green bond projects contain one eligible
category. Future projects however could include a combination
of these outlined categories to boost their sustainable impact.
Eligible green projects under this joint definition should include
renewable energy such as wind, solar, and hydro plants that
meet federal water standards and additional environmental
requirements described in the Water Climate Bonds Standard.196
However, given the debatable impact of nuclear, coal, or “fuel
efficient” technologies that still require the use of carbon-based
fuels should not be eligible.197 Pollution prevention projects
including greenhouse gas control should be eligible. However,
10 Sustainable Development Law & Policy
water pollution projects should be restricted unless the project
plan has specific outlines for determining if energy consump-
tion will be less than energy savings.198 Additionally, sustainable
farming and fishing projects, including biological drop protec-
tion and drip irrigation systems, should be eligible under the
joint definition if they can prove their sustainable management
and conservation impacts.199 Moreover, conservation efforts
on land and sea should also be eligible including protection
of marine or watershed environments.200 Eligible green bonds
should include electric and non-motorized public transporta-
tion as well as clean energy passenger vehicles.201 All projects
that include construction of residential or commercial buildings
would also be required to follow to LEED202 green building
certification standards.203 While this definition should not be
deemed exhaustive as to include future emerging categories,
it will give investors and issuers a definitive answer as to what
qualifies as a “green project.”
Issuers and investors would also benefit from a certification
process that allows green bonds that meet the definition to be
advertised as such.204 In addition to its “organic” definition, the
USDA National Organic Program labels certified organic prod-
ucts and outlaws mislabeling them without the certification.205
Likewise, the SEC can provide a certification process similar to
Moody’s GBA206 for eligible green bond projects that meet the
definition and requirements. The certification process should con-
sider the organizational structure managing the bond, the use of
investor proceeds, the issuer’s level of disclosure on the use of pro-
ceeds, management of said proceeds, and the ongoing disclosure
of information throughout the bond’s maturity.207 This will allow
investors to be sure their funds are being used properly and will
differentiate issuers who want to advertise their environmental
efforts versus those who just wish to reap financial benefits.
While the definition and certif ication process may take
some time to develop, its implementation will alleviate confu-
sion by investors, protect issuers with prosperous green plans
from negative press of “being green in name only,” and ensure
the continuation of a healthy green bond market.208
b. ShowinG your hanD: increaSinG DiScloSure lawS
in the u.S. municipal bonD market
American municipal bonds are particularly vulnerable to
greenwashed projects as currently very few use verification pro-
cesses.209 The MSRB currently drafts consumer protection and
disclosure laws specifically for the municipal bond industry.210
A definition for green projects is helpful for investors at the
onset to decide which bond to invest in, but investors also need
publicly-disclosed information throughout the bond’s maturity
to ensure it ends with beneficial environmental or sustainable
results.211 The disclosure of information will also help prevent
investors from misunderstanding what they have invested in and
will lower the chance they bring a lawsuit against the issuer.212
The MSRB should require municipal issuers to disclose
their green plans, including the use of proceeds, the process for
evaluating and selecting the project, the sustainable impact, and
the management of proceeds at the primary offering of the bond
and continually throughout the bond’s maturation period.213 The
disclosure of information can be of a similar framework to the
GBP and the MSRB’s current disclosure filings.214 Distinctively,
municipal bonds may have several maturity dates, paying off
investors at different times, and making up-to-date disclosure
to the MSRB essential for investors to track the bond’s envi-
ronmental progress.215 However, these rules will have the same
problems as the voluntary GBP unless they are written into law
and enforced by the SEC.216 The use of proceeds will follow the
definition established by the SEC and EPA aiming to address
climate change, renewable resources, or conservation.217
The process for project evaluation will include transparency
determinations and a profile of the sustainability of the proj-
ect.218 Management of proceeds would be disclosed to the public
through the MSRB’s Electronic Municipal Market Access system
(“EMMA”)219 so that investors can check on the progress and
environmental proficiency of their investment. Additionally, the
disclosure laws should require up-to-date reporting of the project’s
progress and the use of proceeds until the bond has matured.220
As is the case with the GBP, verification and extensive
reporting adds costs that do not occur with regular bonds.221
There is concern that too much regulation will turn away new
investors and issuers, and stifle the growth of the market.222
However, combined with a consistent and appropriate definition,
disclosure laws will ensure investors are making educated deci-
sions and prevent issuers from greenwashing their projects.223
Striking a manageable balance means aligning the objectives
of investors, issuers, and regulators.224 The market as a whole
will need to decide if environmental integrity is worth more than
the costs generated by the additional disclosure and verification
c. power to the holDer: leGal accountability for
Green bonDholDerS
In addition to a revamped definition of green bond eligible
projects and increased disclosure requirements for issuers, bond-
holders still require a platform to recover their investments if
they are misled about the project or are subjected to greenwash-
ing. Allowing investors to conjoin their complaints into one class
action lawsuit and litigate a claim against bond issuers together
will lower cost of legal services for bondholders who are fight-
ing deep-pocketed issuers.226 Few investors would carry out
individual claims as they have little financial incentive to do so
against a corporate or municipal issuer.227
Class action lawsuits can also be used as a deterrence
method, which would establish precedent against future viola-
tors.228 Once multiple class actions are successful against green
bond issuers, future issuers would have no choice but to change
their practices or face public scrutiny and financial repercus-
sions.229 Additionally, class action lawsuits aid in preventing
inconsistent rulings across jurisdictions resulting from multiple
individual cases.230 Combined with a green definition and dis-
closure laws, class action precedent would help in establishing
consistent green bond regulation.
11Spring 2017
Once investor complaints are combined, they must be able
to argue and prove that they were misled or defrauded by the
issuer. As in In re Oppenheimer Rochester Funds, where the
bondholders sued the issuers for failure to adhere to the stated
investment objective,231 green bondholders should be able to
bring suits against issuers who renege, mislead, or greenwash
their initial green objectives.
Allowing these class action lawsuits may deter future issuers
from greenwashing their projects misleading their investors.232
Settlements not only reimburse the investors but also force busi-
nesses to change their practices though punitive damages and
negative publicity.233 Since green bonds are relatively novel, this
precedent will be beneficial in enforcing future environmental and
sustainability regulations against corporations or municipalities
outside the bond context.234 While the burden on bondholders
remains high, as seen in Abell v. Potomac Ins. Co.,235 it is impor-
tant for investors to have legal actions against issuers. A consistent
definition and disclosure requirements will help establish good
practices for issuers, making it easier for investors to prove they
actually relied on the issuers’ false statement.236 Class action law-
suits are a proven legal practice against bond issuers,237 and green
bond investor lawsuits should operate no differently.
v. conclusIon
When the European Investment Bank issued the first green
bond in 2007 to spark private and public sector action in the
fight against climate change,238 few anticipated it would grow
to the market size it is today. Green Bonds are an exponentially-
growing financial market issued at over $40 billion in 2015239
with 2016 forecasts predicting $100 billion worldwide.240
With the rise of this industry, regulations are needed to ensure
its effectiveness in enhancing sustainable development.241 The
SEC, in conjunction with the EPA, should establish a definition
and certification process determining what is eligible for green
bond investment. The MSRB should also require the disclosure
of data from municipal bond issuers to ensure they fulfill their
sustainability promises. Finally, allowing green bondholders to
file class action lawsuits against issuers who mislead or subject
them to greenwashing will establish precedent and deter future
issuers from acting similarly.
As former Treasury Secretary Hank Paulson Jr. puts it, “[w]
e have the ideas, the models and the capital to make it [a sustain-
able economy] happen. What’s needed now is leadership from
global policy makers to prioritize the development of a global
green finance system.”242
Al Gore, Former Vice President, United States, Speech at Sierra Club’s
National Environmental Convention and Expo in San Francisco (Sept. 9, 2005)
(transcript available at
See Development and Climate Change: a Strategic Framework for the
World Bank Group, wbG at 1 (June 28, 2012),
0053B.pdf [hereinafter Strategic Framework] (acknowledging the uncertainty
about climate change policy in 2008).
See What are Green Bonds?, the worlD bank treaSury, http://treasury. (last visited Mar. 4,
2017) [hereinafter What are Green Bonds].
See id.
See Tom Zanki, Green Bonds Soar Despite Uncertain Legal Environment,
law360 (Apr. 28, 2016, 6:38 PM),
See Green Projects from Around the World, the worlD bank treaSury, (last visited
Mar. 5, 2017) [hereinafter Green Projects] (detailing the types of projects
funded by green bonds).
What are Green Bonds, supra note 3.
See Tom Zanki, NYC Comptroller Pitches Green Bond Program, law360
(Sept. 24, 2014, 8:47 PM),
comptroller-pitches-green-bond-program (describing municipalities’ eagerness
to increase green bond issuance).
See Namrita Kapur, With Green Bonds, Legitimacy Comes to Those
Who Verify, envtl. Def. funD (Mar. 30, 2016, 1:51 PM), http://business.
verify/?_ga=1.60087789.1398288046.1470010915 (echoing concerns across
the industry about lack of standards).
See How to Issue a Green City Bond, climate bonD initiative 2 (2015),
See Zanki, supra note 5.
See id.
See intl cap. mktS. aSSn, Green bonD principleS 1-6 (2016), http://
See Kapur, supra note 9.
See id.
See Dave Kansas, What Is a Bond?, wall St. J. (2005), http://guides.wsj.
See id. (breaking down the definition of a bond into layman’s terms).
See id. (explaining how bondholders are repaid for their investments).
See SIFMA, The Role of Bonds in America, inveStinG in bonDS, http:// (last visited Mar. 5,
See What is a Social Impact Bond?, GolDman SachS, http://www.goldma- (last visited Mar. 5,
2017) (defining social impact bonds as creative and novel financial tools that
use private investment to support high-impact social programs such as, address-
ing incarceration rates or low academic performance).
See Understanding Climate Bonds, climate bonD initiative, https://www. (last visited Mar. 5, 2017).
See Climate Bond Standard, climate bonD initiative 3 (Dec. 6, 2016),
v2_1%20-%20January_2017.pdf [hereinafter Climate Bond Standard] (spelling
out the purpose for green bonds).
See intl cap. mktS. aSSn, supra note 13, at 7.
See Green Bonds, unDp,
solutions/green-bonds.html (last visited Mar. 3, 2017).
See id.
26 See id.; see also Press Release, Iowa Fin. Auth., Iowa Finance Authority to
Issue Approximately $323,460,000 in Iowa Finance Authority State Revolving
Fund (SRF) Revenue Bonds (Green Bonds) (Jan. 28, 2015) http://www.iowasrf.
com/file.cfm/media/news/Bonds1_C7EA6E42C838F.pdf (announcing $332.46
million in green revenue bonds to be paid back to the State through water
related taxes and fees).
See unDp, supra note 24; see also OPIC Issues First Green Guaranties
Supporting Climate-Friendly Investments, OPIC,
investments (last visited Mar. 5, 2017).
See unDp, supra note 24.
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