Co-author Morgan M. Gerard
Green bonds are fixed-income debt instruments earmarked for environmental or climate change initiatives. As companies undertake more “green” initiatives, including investing in renewable energy generation, the green bond market has grown rapidly. According to Climate Bonds Initiative, in 2015 there were $41.8 billion green bonds outstanding—a dramatic increase from the $2.6 billion in bonds in 2012. In the United States, municipalities and utilities entered the market first through new green offerings; however, it has long been predicted that private corporations with sustainability and other climate change reduction goals would soon flood the market.
Last month, technology giant Apple Inc. entered the environmental financing arena and filed a nine-tranche debt offering, including the Fruit’s first ever green bond. The seven-year bond’s profits will be reserved to develop the company’s green buildings infrastructure and fuel sustainability improvements along its entire supply chain, as well as to increase investment in renewable energy. According to Reuters, Apple’s first bond issuance was $1.5 billion and became the largest green bond to be issued by a U.S. corporation.
Although Green Bonds have Many Benefits, They also have Drawbacks
As more corporations jump into green bond issuances, accounting firm KPMG notes that the financing tool has both benefits and drawbacks. On the benefits side, green bonds “can give issuers access to a broader range of investors,” and “attract new investors focused on environmental, social and governance (ESG) performance.” Additionally, investors may be more comfortable with the green bond model since with these ‘use of proceeds bonds,’ repayment is tied to the issuer, not the project. Therefore, issuers are able to raise capital for riskier projects, while investors are better secured against non-performance. Yet, reporting and transparency are keys to validating the green credentials of the bonds; investors need to know that their bond holdings are financing green endeavors. Thus, KPMG notes that drawbacks of the bonds include the need for more tedious accounting for projects to ensure their “greenness” and the associated additional verification costs.
The Climate Bond Initiative reports that the accounting mechanisms have improved over time and are becoming more standardized and transparent. For instance, the Climate Bond Standard V2 was launched in December 2015, along with the development of sector specific standards on water, geothermal, bioenergy, low carbon transport and low carbon buildings projects. Another key development was the update of the Green Bond Principles to include more emphases on reporting and assurance. These initiatives will work to grow the market by helping companies and investors alike become more comfortable with this financing instrument.
Apple is Changing the Distributed Generation Landscape
Apple’s offering and increased green bond transparency standards will change the landscape as more large energy consumers opt to own or purchase distributed generation rather than to accept what the regulated utility has to offer. Other technology giants are moving to reduce their carbon footprint and increase their energy security as well, particularly in the data center sector. Thus, Apple’s green bond issuance may be a harbinger of things to come as companies turn to green bonds and other innovative financing mechanism to reach their sustainability goals and to fund their investment in distributed renewable energy generation.