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November 19 -- 2019 Preview, Part 1
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A growing number of states and municipalities are going “green” with their bond sales. Developed about a decade ago to allow environmentally conscious investors to identify investments aligned with that priority, green bonds have become a useful funding tool for state and local governments at a time when the Trump administration has been walking back environmental policy, such as the Paris Agreement on climate change.
Three states - California, Massachusetts and New York - account for most of the green bonds sold in the past five years, $2 out of every $3 worth. In 2016, for example, the Massachusetts Water Resources Authority issued $682 million in green bonds.
But municipalities have also been experimenting with the bonds ever since DC Water, which serves the greater Washington, D.C. area, became the first water authority in the world to issue environmental impact bonds with its sale of $350 million worth in July 2014 to finance a phase of its Clean Rivers Project. Municipal issuance of green bonds doubled last year to $11 billion and is expected to nearly double again this year.
There are a number of issues hindering wider acceptance of such bonds, however. One is the difference of opinion among issuers and investors about what is and isn’t green. In some cases it’s led to accusations of “greenwashing,” such as when the Massachusetts State College Building Authority held a green bond sale in early 2015 in part to provide funding for a 725-car garage.
Another issue with the bonds is that DC Water set the early standard of providing annual reports to investors detailing where their money is being spent and the impact that spending is having on the environment. And some investors have come to expect that sort of environmental impact reporting, which involves additional work and expense for issuers.
Some issuers have found ways around that hindrance. For example, the Massachusetts Water Resources Authority has done so by only offering bonds for the refinancing of projects completed under the federal Clean Water Act and Safe Drinking Water Act.
“We thought it would be just as easy to issue refundings as green bonds because investors already know what that money was spent on,” said CFO Tom Durkin. “We have limited resources and try to be frugal here. To have to produce a glossy five- or six-page report seemed like one more burden we didn’t want to put on our Treasury Department.”
But many issuers still aren’t sold on green bonds, at least partly because they haven’t seen a proven financial benefit to offering them.
“[When] we start to see a pricing bump,” said Debby Cherney, deputy general manager for the Eastern Municipal Water District in Southern California, “then we’ll certainly take a much more serious look at coming into the market.” (GOVERNING)