Green bonds finally came to America -- and boy, did they make a splash. This June, Massachusetts became the first state to offer them to investors. The sale was an outright success: The commonwealth sold $100 million of them, and could have sold more -- the sale was oversubscribed by about 30 percent. Massachusetts also sold the bonds to between eight and 10 institutional investors who had never bought the state’s bonds before.
The idea of green muni bonds is to use the money raised to fund environmentally friendly projects. The proceeds from this sale will go to finance Massachusetts’ new Accelerated Energy Program, which aims to reduce energy consumption by 20 to 25 percent at over 700 sites across the state. The goal is to save about $43 million annually in energy costs through these efforts.
There is nothing radically new about green bonds. The World Bank has been issuing them since 2008, selling more than $3 billion to finance projects to combat climate change. Indeed, it isn’t even new for states and localities to use municipal bonds to finance environmental projects. More than $1.7 billion in muni bonds have been sold in 2013 with the promise the money would be spent on green projects, according to Thomson Reuters.
What’s new here is the use of the word “green.” With green bonds, Massachusetts is trying to do two things: Use the popularity of environmental stewardship to sell them and tap into investors’ growing desire to know how their money is being spent. Investors are increasingly looking to develop “part of their portfolios for projects that are sustainable or have a green or environmentally sound mandate,” Steve Grossman, Massachusetts’ state treasurer, said on Bloomberg TV’s “Bottom Line.” “Why not offer them bonds that are going to be used for the purpose of investing in and allowing these projects to move forward?”
But can green bonds help tackle climate change and be a sustainable funding source? Other than the green component, these bonds are no different from any other bond. They carry the state’s general obligation pledge, meaning they are backed by the commonwealth’s full faith and credit, and they are tax deductible.
For his part, Grossman isn’t convinced green bonds will remain a reliable funding source. “I think green bonds will go the way of other bonds,” he told Mark Crumpton on “Bottom Line.” “Green bonds have a scarcity value. So in that sense if you are looking for new product to legitimately fund environmentally sound projects, it is a win for the state, it is a win for investors, it is a win across the board.” Or at least it is for now.
But there is a lot to suggest that, currently, the green label alone is enough to attract investors for the long haul. Massachusetts’ green bonds were part of a larger offering. The state put up $1.1 billion in bonds, and as of early June, had only sold $671 million -- but the $100 million of green bonds had more buyers than bonds available for them. Last year, Warren Buffett’s Berkshire Hathaway issued $850 million in green bonds to help finance its $2.4 billion Topaz Solar Farm in California. The offering was so popular that it was oversubscribed, forcing Berkshire Hathaway to increase its initial issuance an additional $700 million. This also highlights a growing interest by institutional investors in renewable energy projects, in part, because of their reliable income from long-term power projects.
Other recent trends further bolster the sustainability of green investments: One is the rise of benefit corporations. Unlike traditional commercial firms, benefit corporations must create a material positive impact on society. In other words, they must consider how their decisions affect employees, the community and the environment -- not just the firm’s profit margin. Since 2010, benefit-corporation legislation has been enacted in 14 states and the District of Columbia, and is under consideration in 20 more.
It’s not clear that 10 to 20 years from now green bonds will still serve a purpose. But for now there does seem to be a growing appetite among investors for environmental options. And “green” appears to be the magic word.