Green Bond Labeling

July 2015 | Green Bonds

We recently contributed a blog post to AlphaBaskets, AdvisorShares blog, on defining the ‘green’ in a green bond. There continues to be an ongoing debate on labeling. For the investors we speak with, many still aren’t aware that there are bonds in the marketplace, not labeled ‘green’, that are financing remarkable and important environmental projects. You might be wondering what types of bonds finance green initiatives that don’t necessarily have a ‘green’ label? Here are just a few examples of those we purchase:

Municipal Bonds: a fixed-income security issued by a local government where the income is typically exempt from tax. Taxable municipal bonds are subject to federal taxes, but in some instances are exempt from state and local taxes. Many of these issues have multiple green components but do not necessarily have a ‘green’ label. For example, financing of energy audits and energy efficiency improvements for residents of a state. Here is another example…financing of various energy improvement, conservation and renewable energy projects for state agencies, school districts and privately held businesses in a state. Both have incredible environmental benefits with no ‘green’ in their issue line.

• Agency Multifamily Mortgage-Backed Securities: a fixed-income security issued by the government or a government agency that pools multifamily residential property mortgages. Many of the properties in these pools incorporate tremendous green improvements and efficiencies. For example, an affordable, sustainable residential development providing for healthy, urban living where some of the green features include (we couldn’t list all of them because there are too many): storm water reclamation system recycles water for irrigation; motion sensors in stairways and corridors conserve electricity; and building-integrated photovoltaic panels producing electricity from the sun’s energy. Surprised that it doesn’t have a ‘green’ label? Us too.

• Small Business Administration (SBA) Loans: the SBA participates in a number of loan programs designed for business owners who may have trouble qualifying for a traditional bank loan. Many of these loans are financing environmentally friendly businesses or those incorporating environmental practices. For example, a small business recycling company or a small business producing cheese using agriculturally sustainable, locally-sourced fresh goat’s milk. These small businesses are contributing to a healthier, cleaner and more sustainable world. Yet, once again, there is no ‘green’ in their label.

Institutional and individual investors can integrate environmentally screened bonds into their portfolios without the requirement of a ‘green’ label to have an environmental impact. A clear use of proceeds is the key to any labeling and even then, it is still up to the investor to decide if it meets their ‘green’ criteria.

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