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Monday, November 3, 2014

Strategic CSR - Green bonds

The article in the url below reports the latest developments in the market for green bonds:
"… instruments which tie the proceeds of a bond issue to environmentally friendly investments. Issuers of green bonds raise money, promising to spend it on (for example) building wind farms or less-polluting factories."
The market for these environmental/social-impact bonds has increased significantly in only the last two years:
"In 2012 $3 billion of such bonds were sold. In the first six months of 2014, the sum was about $20 billion, nearly twice as much as in 2013 as a whole. … Climate Bonds Initiative, a research group, reckons the cumulative value of all green bonds will be around $50 billion by the end of 2014. … two or three times more than German taxpayers will spend subsidising wind and solar energy—the largest green subsidy in Europe."
And, as the market for green bonds evolves, more entities (in particular, for-profit firms such as Unilever and Toyota) have started to issue them:
"All green bonds are investment grade; many have been two or three times oversubscribed; half were issued by companies, a switch from 2013, when most green bonds were sold by international agencies such as the World Bank."
As these types of bonds become more popular, however, the definition of what constitutes a green bond has become more contentious:
"The trouble with this sort of discretion is that different people have different views. Is fracking green? Is nuclear power? The definition is likely to be tested further because a big oil firm is working on a green bond to finance a carbon-capture and storage (CCS) scheme. CCS is an important technology—but oil firms are, for the most part, seen as beyond the pale by greens."
As a result, green bonds are running into a problem that eventually faces any diffusing practice—the issue of validation:
"A market needs standardised products. … Earlier this year 13 banks drew up a shared set of principles governing different categories of bonds; 49 institutions have signed up. Nonetheless, there is far from universal agreement over the question, 'What makes a bond green?' At the moment the answer is, 'If someone says it is.'"
Similar challenges threatened (and, ultimately, undermined) the legitimacy of carbon offsets, which we no longer hear much about. Given the size of the market for green bonds relative to the total bond market ($50 billion verses $80 trillion), we should hope that green bonds are given a more stable footing than carbon offsets, and that this happens sooner rather than later.
Take care
David Chandler & Bill Werther
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Green grow the markets, O
July 5, 2014
The Economist
Late Edition – Final