New Energy Economy

05.27.14

The Bond Market Goes Green

Companies are increasingly offering ‘green bonds’ in order to raise money for sustainable projects—and to appeal to socially conscious investors.
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Debt is referred to as red ink. But a bunch of companies that are raising money to spur the adoption of renewable energy and more intelligent energy use are turning the red ink into green.

Earlier this week, Regency Centers, a shopping center developer, sold $250 million in so-called green bonds. The company will use the funds to construct, buy, or redevelop energy-sipping projects that meet the standards of the Green Building Council.

Regency’s offering is part of a larger trend. In January, a group of investment banks banded together to establish criteria for green bonds. In the first quarter of 2014, according to the Wall Street Journal, some $7.4 billion in green bonds were sold by companies—to finance the purchase of hybrid vehicles, and the construction of super-efficient new factories.

Green bonds, as the Wall Street Journal reports, got started with non-profit lenders like the World Bank. In May 2013, the first private-sector green bond was issued by PNE Wind, a German company that builds and runs wind farms.

To a degree, green bonds are an exercise in public relations. The first U.S. offering came last fall, when Bank of America issued $500 million in green bonds. The giant bank, which has been under regulatory assault since the financial crisis, is seeking to burnish its image by aggressively backing clean energy projects. Bank of America said it would use the funds to back green projects ranging from renewable energy power plants to better insulation in buildings. 

But they are also meant to appeal to investors. Increasingly, large pools of money controlled by endowments and other institutions are establishing socially conscious criteria for their investments. Stanford University, for example, recently decided to sell its shares in coal companies. Green bonds allow companies like banks and automakers to offer investment products to a pool of investors that may otherwise avoid them.

They often bear lower interest rates than comparable non-green bonds, meaning they are a better credit risk.

Green bonds often provide dedicated funds to specific projects. The Anglo/Dutch consumer products giant Unilever in March 2014 sold 250 million pounds (about $400 million) of green bonds that will be used to fund efforts that will reduce carbon dioxide emissions by 50 percent (for new projects) and 30 percent (for retrofitted factories.) The projects to be financed included a laundry powder factory in China and an ice cream factory in South Africa. One of the biggest single green bond offerings has been from Toyota, which in March sold  $1.75 billion in green bonds. The money raised will be put to use to finance the sale and leases of Toyota and Lexus hybrids.

Green bonds don’t necessarily pay a higher return than conventional bonds. In fact, they often bear lower interest rates than comparable non-green bonds, meaning they are a better credit risk. Here’s why. Energy saving technologies and hybrid cars may cost more than conventional ones to purchase. But they tend to cost less to operate. Compare two identical houses, one next to the other, with the same mortgage payment. But one has a solar system on the roof that cuts the monthly electricity bill by $75. In theory, the owner of the home with the solar panel system will be a better credit risk because her monthly expenses are lower. The same holds true for owners of hybrid cars, who spend less on gas than owners of similarly priced conventional vehicles.

The Wall Street Journal noted that the green bonds issued by Regency Centers had an interest rate of 3.75 percent—significantly lower than the rate on recent plain vanilla bonds issued by comparable real estate companies.

When it comes to issuing debt, green bonds can help put companies into the black.