Green Bonds

Consistent growth of Green Bonds provides options for issuers

The Green Bonds market is evolving quickly and providing issuers with a tool to respond to growing public desire for addressing climate challenges. In the United States, Green Bonds issuance in the municipal segment has grown from $4.2 billion in 2015 to $7.2 billion in 2016 according to Bloomberg. Estimates from the Climate Bond Initiative suggest that $30 billion of municipal projects meet green standards, although only one-third of these projects were offered with the green label. Green Bonds are virtually indistinguishable from traditional muni bonds except that issuers of Green Bonds agree to routinely monitor and provide information affirming bond proceeds are used for green projects.

Although the issuance of Green Bonds may require issuers to take on additional reporting and auditing requirements, Green Bonds confer distinct advantages and strategic benefits to issuers. For example, issuers’ green-related initiatives may find dedicated sources of finance that can turn green plans into reality. Green Bonds also offer governments the chance to demonstrate their commitment to environmentally conscious mandates and address the growing appeal of sustainability policies to citizens and investors.

There are indeed other factors that need to be considered for this fast-growing Green Bonds market. One commonly discussed is additional costs to issuance. For example, an independent review as part of the compliance process for green standards costs from $10,000 to $50,000 depending on the type of project, according to the Brookings Institution. Another consideration is the evolving definition of “green”; there’s yet to be a universally accepted standard. Also there may be some reputational risks where an issue’s green credentials are challenged for failure to meet compliance and reporting expectations. Finally, it is unclear, at this time, whether issuers receive preferential pricing for taking on the risks attendant to issuing Green Bonds.

Despite these concerns, prominent issuers continue to execute Green Bonds financing programs, including some of the top Green Bonds issuers in states like Massachusetts, California, New York and Washington. As of May 2017, Metropolitan Transportation Authority, one of the largest Green Bonds issuers, had issued over $2.53 billion in Green Bonds backed by transportation revenue and dedicated tax funds. The New York City Housing Development Corporation is another example of an issuer that has taken the Green Bonds concept of stimulating positive social outcome and placed its own unique stamp on the market.

Raymond James has served on more than 50 Green Bonds issues as a senior manager or a co-senior manager since the first Green Bonds issuance in 2014, for a variety of Green Bonds issuers across the nation in states like Massachusetts, New York, California, Connecticut, Illinois, Indiana, Florida, New Jersey and Virginia. In December 2016, Joseph Tait served as a co-senior manager on the New York City Housing Development Corporation’s $191 million Green Bonds issue, which was designated as Sustainable Neighborhood Bonds. Such bonds support the development corporation’s mission of increasing the supply of multifamily housing, stimulating economic growth, and revitalizing neighborhoods through the creation and preservation of affordable housing for low-, moderate- and middle-income New York City residents. The bonds finance socially beneficial and sustainable projects that make infrastructure sustainable and cheaper over project life-cycle, and not “cheapest to build.” Many projects financed with Sustainable Neighborhood Bonds are expected to receive Enterprise Green Communities (EGC) certification and Leadership in Energy and Environmental Design (LEED) certification.

Mr. Tait reports that the corporation has been able to substantially lower its issuance costs in the past because large New York City money center bank have purchased the bonds to meet banking Community Reinvestment Act requirements.  Mr. Tait believes the Sustainable Neighborhood Bond designation simply provides both bank and non-bank investors one more reason to buy New York City Housing Development Corporation Bond issues. “Issuers like the corporation, which are funding environmentally friendly and sustainable projects, should start thinking long term and position themselves at the forefront of the Green Bonds movement,” Mr. Tait notes.