There has been tremendous growth in green bonds as the benefits become more apparent to both investors and issuers. Last year, almost twice as many green bonds as expected were issued, and in the first quarter of 2017, issuance stood at $21.76 billion, up nearly 42 percent from the same period last year.
What’s more, a new report by the Organization for Economic Co-operation and Development (OECD) estimated that the green bond market could increase to $4.7 trillion to $5.6 trillion in outstanding bonds by 2035, with annual issuances of $620 billion to $720 billion.
While green, sustainability (an issue with both environmental and social impacts) and blue (related to ocean and water impacts) bonds are relatively new financial vehicles, it’s unlikely their growth will slow. Not only does a transition to a 2 degrees Celsius future require a major shift in investment patterns, but more entities — notably corporations — are considering and issuing green bonds.
The corporate sector has increased — in fact tripled — its participation in the green bonds market as energy, automotive and even consumer goods and technology companies have looked to green bonds as a way to finance important sustainability investments. In the past year, an increasing amount of companies have realized the multiple benefits gained by issuing green bonds. Here are some big reasons why:
1. Disclosure requirements help communicate the sustainability narrative
To be seen as green by investors, green bonds often need to voluntarily comply with a set of disclosure requirements. The most common of these is the Green Bond Principles, which provides issuers guidance on launching a green bond and outlines the necessary information investors would need to evaluate its environmental impact.
Aligning with the Principles can help companies tailor their sustainability strategy to the investor audience, as well as provide an opportunity to create performance indicators to ensure the use of green bond proceeds. Many investors also prefer if a green bond has a second party opinion, which requires issuers to define the sustainability initiatives that will be financed by the green bond and how they will measure that performance.
Charlotte Peyraud, senior advisor of institutional relations at Sustainalytics, a provider of second party opinions, referred to this particular benefit: “Investors increasingly require greater levels of transparency from the companies in which they invest. A second party opinion not only allows issuers to highlight the environmentally and socially beneficial initiatives that will be financed by bond proceeds — along with the clear and measurable impacts — but also provides an opportunity to highlight their key sustainability goals and objectives.”
Issuing a green bond requires some additional effort on behalf of the issuers. However, we often see that the process is a good learning experience for the organization.
2. Internal integration between finance and sustainability teams
Current research describes the benefits of getting finance and sustainability teams talking to each other. Not only do finance teams have the opportunity to attract new investors and understand a wider view of business risks and opportunities, but sustainability teams can improve their understanding of investor perspectives to more clearly communicate the financial value of a company’s sustainability efforts, and in the case of green bonds, access capital for those efforts.
Drew Wolff, vice president of treasury at Starbucks Coffee Company, which last year issued a $500 million sustainability bond, described how this benefitted Starbucks internally: “We’ve partnered on other sustainability projects in the past, but integrating our corporate sustainability strategy with a core part of our capital structure has raised our level of integration and cooperation.”
For many companies, working together on a green bond may be the first time that finance and sustainability divisions have an opportunity to collaborate. Kristina Alnes, senior advisor of Climate Finance at CICERO, a climate research institute and provider of second opinions on green bonds, explained, “Issuing a green bond requires some additional effort on behalf of the issuers. However, we often see that the process is a good learning experience for the organization. Setting up a green bond framework requires that the financial and environmental staff work together — often for the first time.”
3. Helps provide funds for sustainability initiatives
The most obvious benefit of green bonds for companies is that they can provide much needed capital for sustainability-related projects. Often, sustainability departments operate with lean budgets, but supporting a company’s transition to a cleaner future can require significant upfront investments.
Fortunately, there are an increasing number of examples of companies issuing bonds to finance sustainability projects ranging from renewable and clean energy, to water efficiency improvements, reforestation, supply chain resiliency (PDF) to manufacturing more electric vehicles or emission-free taxis.
4. Demand remains high from investors
Green bonds are also rising in popularity among investors. For investors, green bonds allow them to invest in sustainable products and initiatives without taking on additional risk, even helping to hedge against certain types of climate risk. Alnes from CICERO agreed: “So far, investor interest has outpaced supply, driven both by a desire to invest in sustainable products and to use green bonds as a hedging tool against climate risk.”
In recent months, investors actually have found green bonds to be less risky than regular bonds, indicated by tighter yield curve. For traditional bonds, non-disclosed environmental risks are often left off of the balance sheet and can later culminate into significant losses, while green bonds have environmental impacts already included. For companies, this translates into a growing, receptive market where they can pitch investment.
5. A doable learning curve for finance teams
Although extra requirements go along with green bonds, because green bonds are a variation of traditional bonds, corporate finance teams are often well-equipped to take them on. While other sustainability financing tools, such as power purchase agreements (PPAs), are pursued by corporates, they are less familiar to finance teams and often require a period of “skilling up” on the finance mechanics. This often makes the “sell” of a green bond internally easier to do, and less time is required of the finance team to get up to speed on how to structure them.
6. Enhances company reputation and confirms its sustainability commitments
Finally, when companies issue a green bond, it tends to get a lot of attention. Getting recognition for an innovative approach towards sustainability is another benefit for companies who issue them.
Apple’s landmark $1.5 billion bond was the first green bond issued by a technology company and was highly publicized, which may have contributed to it winning Environmental Finance’s 2016 corporate green bond of the year award. Starbucks, too, received significant positive press when it issued its sustainability bond for sustainable agriculture improvements. Issuing a green bond can raise the awareness of a company’s commitment to sustainability and convey leadership.
For Fibria, a Brazilian pulp company that issued its first green bond earlier this year, Cristiano Oliveira, of the company’s Sustainability team, stated, “For a company that aspires to be a sustainability leader, green bonds are a step in the right direction.”
The rise of green bonds issuance is growing and is a financing option for companies that can offer multiple benefits. For companies looking to raise capital for sustainability initiatives, what would you fund with a green bond?
This post originally appeared on Greenbiz.