Monday, June 25, 2012

What are green bonds?



Green Bonds
"The concept of green bonds as a financial vehicle has floated around for years. The idea comes in different forms. The World Bank has encouraged the use of green bonds as an innovative way to finance low-emissions energy technology. The U.S. Treasury Department has green bonds as a pithy name for low-interest loans to clean energy companies. Investment banks have proposed creating green bonds that can be traded for profit, just as credit default swaps and other mortgage-backed securities had been before the housing bubble popped."  NYTimes 2/7/2011


Green bonds may be used for any project that strengthens energy efficiency, green technology or climate related programs. Just as the New York Times quote above indicates, there is a wide range of projects that government, personal or pension funds can contribute to in the green economy.

Among the global leaders in pension funds are the Norwegian Government Pension Fund-Global; ABP, along with the Dutch government pension fund; and the pension fund of the British Environment Agency. Within California the two larges funds include: the California Public Employees Retirement System (CalPERS) and the California State Teachers Retirement System (CalSTRS), which are two of the largest in the United States, with in excess of $400 billion under management. Their investment practices can impact how green projects are funded and managed. CalSTRS is one of the few American funds that have become a green investor. Denmark’s ATP, as well as the Dutch fund PGGM are also funding green programs.

In their portfolios they do not specify the types of projects that they finance, instead their annual reports indicate the sectors of investments, such as global equities, venture capital, mutual funds, etc.
 
Pension funds may support urban sustainability plans because they have lower risk for investors. For example with the PACE model, local governments provide the vehicle either through a municipal bond or provide the administrative support to find qualified homeowner and business owner who will repay back loans. Since the energy efficiency component of the mortgage stays with the property (located in the non ad valorem assessments agreements) the city administration is a valuable contributor of the process.

Private pension funds have up to US$1 billion in assets. State bonds provide security for those assets. Institutional investor markets seek pension funds to build capital markets and provide financing for a bond market within a country.  Non-credit risk, such as the additionality from the development banks, help access these markets and help them grow. Traditionally, rates may very from 10-20% to leverage 5 to1 with partial rate for these guarantees.

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