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...
• Pages: 4-11

4Sustainable Development Law & Policy

Green GreeD iS GooD: how Green bonDS

cultivateD into wall Street’S

environmental paraDox

Luke Trompeter*

AbstrAct

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

regulations.225

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

enDnoteS

1

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 http://www.alternet.org/story/25349/a_moral_moment).

2

See Development and Climate Change: a Strategic Framework for the

World Bank Group, wbG at 1 (June 28, 2012), http://documents.worldbank.org/

curated/en/732681468150874549/pdf/688160REVISION0se0Only090Box37

0053B.pdf [hereinafter Strategic Framework] (acknowledging the uncertainty

about climate change policy in 2008).

3

See What are Green Bonds?, the worlD bank treaSury, http://treasury.

worldbank.org/cmd/htm/WorldBankGreenBonds.html (last visited Mar. 4,

2017) [hereinafter What are Green Bonds].

4

See id.

5

See Tom Zanki, Green Bonds Soar Despite Uncertain Legal Environment,

law360 (Apr. 28, 2016, 6:38 PM), https://www.law360.com/articles/789719/

green-bonds-soar-despite-uncertain-legal-environment.

6

See Green Projects from Around the World, the worlD bank treaSury,

http://treasury.worldbank.org/cmd/htm/MoreGreenProjects.html (last visited

Mar. 5, 2017) [hereinafter Green Projects] (detailing the types of projects

funded by green bonds).

7

What are Green Bonds, supra note 3.

8

See Tom Zanki, NYC Comptroller Pitches Green Bond Program, law360

(Sept. 24, 2014, 8:47 PM), http://www.law360.com/articles/580568/nyc-

comptroller-pitches-green-bond-program (describing municipalities’ eagerness

to increase green bond issuance).

9

See Namrita Kapur, With Green Bonds, Legitimacy Comes to Those

Who Verify, envtl. Def. funD (Mar. 30, 2016, 1:51 PM), http://business.

edf.org/blog/2016/03/30/with-green-bonds-legitimacy-comes-to-those-who-

verify/?_ga=1.60087789.1398288046.1470010915 (echoing concerns across

the industry about lack of standards).

10

See How to Issue a Green City Bond, climate bonD initiative 2 (2015),

https://www.climatebonds.net/files/files/GCB%204%20pager%20final%20

edits%20vc-02_300Copies_170gsm_Bleed%20(1).pdf.

11

See Zanki, supra note 5.

12

See id.

13

See int’l cap. mktS. aSS’n, Green bonD principleS 1-6 (2016), http://

www.icmagroup.org/Regulatory-Policy-and-Market-Practice/green-bonds/.

14

See Kapur, supra note 9.

15

See id.

16

See Dave Kansas, What Is a Bond?, wall St. J. (2005), http://guides.wsj.

com/personal-finance/investing/what-is-a-bond/.

17

See id. (breaking down the definition of a bond into layman’s terms).

18

See id. (explaining how bondholders are repaid for their investments).

19

See SIFMA, The Role of Bonds in America, inveStinG in bonDS, http://

www.investinginbonds.com/learnmore.asp?catid=3&id=50 (last visited Mar. 5,

2017).

20

See What is a Social Impact Bond?, GolDman SachS, http://www.goldma-

nsachs.com/our-thinking/pages/social-impact-bonds.html (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).

21

See Understanding Climate Bonds, climate bonD initiative, https://www.

climatebonds.net/resources/understanding (last visited Mar. 5, 2017).

22

See Climate Bond Standard, climate bonD initiative 3 (Dec. 6, 2016),

https://www.climatebonds.net/files/files/Climate%20Bonds%20Standard%20

v2_1%20-%20January_2017.pdf [hereinafter Climate Bond Standard] (spelling

out the purpose for green bonds).

23

See int’l cap. mktS. aSS’n, supra note 13, at 7.

24

See Green Bonds, unDp, http://www.undp.org/content/sdfinance/en/home/

solutions/green-bonds.html (last visited Mar. 3, 2017).

25

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).

27

See unDp, supra note 24; see also OPIC Issues First Green Guaranties

Supporting Climate-Friendly Investments, OPIC, https://www.opic.gov/press-

releases/2014/opic-issues-first-green-guaranties-supporting-climate-friendly-

investments (last visited Mar. 5, 2017).

28

See unDp, supra note 24.

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