05 December 2018
Bond issuers that make 100% of their revenues from green activities should be considered as being in compliance with the Green Bond Principles, argues Suzanne Buchta
At the time the Green Bond Principles (GBP) were written, bonds from 'green pureplays' – companies whose revenues are 100% from green activities – were virtually non-existent.
A green pureplay company may have issued an IPO, but was likely not yet rated and not yet tapping the public bond markets.
Therefore, in the early days, before 'use of proceeds green bonds' were defined and abundant, green bond funds would define green bonds as bonds from those companies that made the majority of their revenues from green activities.
Because of a scarcity of such pureplay green bonds, we designed the GBP to prescribe what a bond from a non-green issuer could do to mimic a bond from a green pureplay issuer.
The intention was not to create unnecessary, bureaucratic processes for issuers that were obviously green – green project issuers, green asset-backed issuers, green pureplays. In fact, we wrote a specific carve-out for such issuers in the original GBP.
On the other hand, we specified in the GBP an additional type of green bond – the 'use of proceeds green bond' – and the additional processes needed for that type of green bond, to enable non-green entities to issue debt that could be bought by green bond funds.
This provided a broader array of options for these fledgling green bond funds, at a time when little green bond product was available.
As it turned out, back in 2013 when we first released the blueprint for the GBP, the 'use of proceeds green bond' was the most easily accessible form of green bond – there were still only a few large green projects financing themselves in the bond market (what green projects broke ground were being project financed on bank balance sheets); collateral, such as electric vehicle loans or solar panel leases, for green asset-backed bonds, was still relatively scarce and non-standardised; green pureplays, as mentioned above, were still in start-up phase or had just barely passed the IPO stage.
'Use of proceeds green bonds' were also the most easily accessible to an investor base shy of new risks after the financial crisis.
Nowadays, that is changing. While green projects still tend to be financed in loan format, a few have tapped the public bond markets.
More interestingly, the amount of green collateral available to package into green asset-backed bonds has reached a critical mass and we are seeing an increasing number of bonds backed by either electric vehicles or solar leases, or mortgages for energy-efficient homes and commercial buildings.
What's more, green pureplay companies are getting rated and are tapping the bond markets – mostly the high-yield bond market, but even the high-grade bond market for some.
These types of green bonds provide a first-order mobilisation of capital – the investor has direct exposure to the risk and the return of the green projects, collateral or companies, respectively.
As a result, they help to lower the cost of capital for the green activities they support.
If 'use of proceeds green bonds' – which represent a second-order mobilisation of capital – are considered green, then surely these green project bonds, green asset-backed bonds and green pureplay bonds are green, and follow the GBP, by default.
Suzanne Buchta is global head of ESG capital markets at Bank of America Merrill Lynch, and one of the original authors of the Green Bond Principles