Green Bonds

Background

Finance is a critical element to any effort to reduce climate pollution and to adapt to impacts of greenhouse gas accumulation in the atmosphere.  A vast amount of capital is needed to protect the world’s climate, with costs estimated at $8 trillion needed to meet US obligations under the Paris Agreement. Worldwide, $93 trillion in investment is needed to meet climate goals.  This need is matched by growing investor demand.  To meet this demand, however, streamlined market metrics and regulatory best practices are needed. With seed funding from the Hewlett Foundation, the Goldman School has embarked on an effort to enhance the market, regulatory and best practices for green bonds, a critical type of investment vehicle for climate-friendly infrastructure.

Green bonds, also referred to as ‘climate bonds’ or ‘sustainable bonds’, provide debt financing to projects that produce environmental benefits. These projects range from energy efficiency building upgrades, to clean energy technology projects, to mass transit expansion. Governments and businesses issue these bonds and investors receive principle and fixed interest payments in return.

From the perspective of an investor, climate change creates risk. By investing in projects that help mitigate or adapt infrastructure to climate change, investors are also managing the risk of their overall portfolio. 

The green designation is a signal to investors that the project has environmental and, typically, climate benefits. To bolster a bond’s validity, green bonds are often analyzed by a third-party verifier. However, because a broad range of projects can have environmental benefits, disclosure and reporting standards for green bonds have been evolving since green bond issuances began in 2007.

In July, CEPP hosted the inaugural Green Bond Market Development Committee meeting, chaired by the California State Treasurer Fiona Ma. The Committee consists of bond issuers, investors, attorneys, public policy experts, climate scientists, and experts in municipal and sustainable finance. Participants noted that green bonds help cities secure financing for climate projects by diversifying the investor base, improving assessment of climate risks.  As the market for green bonds grows, green bonds can attain a more favorable price structure over conventional bonds, thereby lowering finance costs for green infrastructure. Barriers exist, however, on both sides of the bond transaction. Governments and businesses need training on how to issue and administer green bonds; investors need tools to ensure that environmental labels are accurate and measureable.

The Goldman School is serving as the secretariat for the Committee, and is developing a work plan for education, training, research and policy analysis to expand the market for green bonds in California.

Green Bond Development Committee Members

Chair: CA State Treasurer Fiona Ma