Green bonds a marketing technique for issuers, but offer limited pricing benefit

22 December 2017
"Green" bonds are a growing trend within the municipal bond market, but the benefits to the structure may be limited as the green label is widely regarded as a marketing technique without much regulation or pricing benefits, several market sources say.
 
Most issuers use green bonds to attract more interest in their issuances, but green bonds offer little distinction from traditional munis in security structure and the projects financed, a portfolio manager said. "Green bonds are a total bullshit play," the portfolio manager said.
 
"There's no investment you can make that's more socially conscious or does more for society than municipal bonds ... I'm not gonna pay minus 10 bps to scale when everything we buy here makes everyone’s lives in the country inherently better - schools, hospitals, infrastructure, roads, bridges tunnels ... everything in munis is helping the greater good of our country."
 
Increasing popularity The popularity of green bonds within the municipal market is growing, according to the Climate Bonds Initiative (CBI), a third-party group that works with issuers to certify issuances as green. The amount of green bonds issued more than doubled to USD 10.5bn in 2016 from USD 4bn in 2014, according to CBI.
 
“There’s a new generation of retail investors coming up, paying attention to climate change and millennials have become much more conscious,” said Al Quintero, managing director of the Municipal Finance Group at Samuel A. Ramirez & Co., Inc. “It’s an important thing to take into consideration as folks like the MTA (Metropolitan Transportation Authority) are selling their bonds and looking for new investors.”
 
The municipal market is a slow-moving entity, but the market is different than the corporate space as most municipal issuances are fundamentally green, Quintero said. “(Munis) fund things that make life more efficient, environmentally friendly and (the market’s) beginning to recognize that opportunity,” Quintero said.
 
The MTA began issuing green bonds in 2016 and fully incorporated them into their debt strategy. Going forward, MTA elected to issue all of its long-term, fixed-rate debt, with the exception of that issued for the Triborough Bridge Authority, as green bonds, said Pat McCoy, director of finance. Quintero and Ramirez worked with the MTA on several of their green bond issuances.
 
“There’s an angle to green bond issuance, a marketing effort to attract additional investors that may not otherwise be interested,” McCoy said. “Increasingly, there are investors out there that want to make deliberate choices in the way they invest, and green bonds have been one of those vehicles to have to make those investment decisions.”
 
By issuing green bonds, MTA caters to a growing base of interested bondholders looking to invest in green and sustainable projects, McCoy said. MTA, as a mass transit organization, has an inherently green mission, he said.
 
Pricing benefits in primary market remain elusive
 
But broader interest in the securities doesn’t necessarily translate to pricing benefits, McCoy said.
 
“We’re not representing savings of a certain amount of basis points, it’s hard to measure that impact in bond pricing,” McCoy said. “To the degree that we can bring additional investors to the table, it facilitates a more efficient ultimate price to the MTA and translates to our paying lower interest for the cost of its life...having green bonds to offer gives them a different characteristic to look at and justify putting in their portfolios.”
 
“To date, I’ve not seen a primary market advantage in interest rates, but there is a secondary market benefit - some are trading better than their non-green brothers in the secondary market,” Quintero said. “I’ve not promised, or been able to deliver savings in the primary market.”
 
But by designating something green, that is the goal: more buyers, which equal more demand and hopefully a better price, said Julie Egan, senior vice president and portfolio manager at Community Capital Management.
 
“You’re seeing more and more funds in the space as there is more and more interest from buyers as they become more aware and interested in the social green perspective,” Egan said. “If they have extra money, and can invest in a mutual fund that’s green versus one that’s not, they may want to invest in the green mutual fund.”
 
Connecticut and California are also prolific green bond issuers.
 
“By offering green bonds, we can attract asset managers, corporations, pension systems and others interested in such specific investments,” according to a statement from the Connecticut State Treasurer’s Office to Debtwire Municipals.
 
A spokesperson for California Treasurer John Chiang declined to comment for this story until the state hosts a Green Bond Symposium in February 2018.
 
Level of regulation a work in progress Municipal issuers sold about USD 5bn in green bonds in 1H17, according to Debtwire Municipals research. But only USD 2.5bn of those issuances were subject to some form of regulation via CBI or Sustainalytics, another third-party group that works with issuers to certify an issuance as green. All of MTA’s green bond issuances were certified by both CBI and Sustainalytics.
 
The muni market seeks to avoid “greenwashing,” or becoming too liberal with the label of green, Quintero said. For example, a debt issuance for a parking lot that may have electric car chargers should not be considered a green project, he said.
 
“(We should) create standards so you can judge if a bond is truly financing a green project,” Quintero said. “(Getting certified) is not a big lift.”
 
The cost for certification is “minor,” Quintero said. A third party reviews how proceeds work and verifies that the projects are indeed green for a small fee—about USD 10,000 to USD 15,000, he said— “nothing” in the context of a USD 500m issuance.
 
“Of course it’s a marketing thing, but investors do want to feel more than their own research (supports a green label),” Quintero said. “Bringing in standards and labeling makes the market function more efficiently.”
 
Standardizing criteria for green issuances could have a chilling effect, said Trisha Taneja, associate at Sustainalytics. In the municipal market especially, there’s so much demand with most issuances oversubscribed, there is little push for regulation, she said.
 
The green bond market self-regulates, meaning that issuances that may not serve a green function may not make it to market, Taneja said.
 
“Munis run themselves, which is unique to the US, but most corporates do want the regulation or certification,” Taneja said. “With corporates, investors want to see the broader strategy.”
 
What qualifies as green is “a big debate,” Egan said. A water system, for example, that’s simply updating their pipes but not updating their business practices to be more eco-friendly, is not a green investment Egan said she would consider.
 
“If it’s new technology, something newer and greener, then I’d contemplate it,” Egan said.
 
Some investors require third-party certification. Egan said she reviews what issuers plan for the use of proceeds of each issuance, and then makes determinations based on her clients’ preferences.
 
The self-regulating nature of the green bond market is an opportunity, not a problem, Egan said. “Once you add regulation, and someone else is defining “green”, then (issuance) can become plain vanilla,” Egan said.
 
“Right now, it’s not plain vanilla, there are differing opinions and you can find advantages and opportunities. Sometimes regulations can impair innovation. The green space is rapidly evolving. We want to encourage that evolution.”