Lately, it seems as if high net worth, RIA, family office, and institutional investors may be seeing the world of bonds more and more through green-tinted glasses. In 2017, $155 billion of green bonds were issued, according to the Climate Bonds Initiative (CBI), a nonprofit that promotes the debt market as a way to raise money for projects related to climate change. CBI expects $250 billion of green bonds to be issued this year, compared with just $3 billion issued in 2012. These figures cover “labeled” green bonds, but what does the label tell investors?
Declaration of Green Intent: It’s a Starting Point
One of the main developments seen so far in the sustainable bond space has been driven by green bonds. The green bond market enables debt markets to fund projects that contribute to environmental sustainability. We’ve also noticed a growing progression towards sustainable bonds that have a wider umbrella including a social positive impact.
The Green Bond Principles (GBP) from the International Capital Market Association (ICMA) promotes integrity in the green bond market through guidelines recommending issuers to embrace transparency, disclosure and reporting. In June 2017, an update to the GBP was released which remains framed by the same four core components (Use of Proceeds, Process for Project Evaluation and Selection, Management of Proceeds and Reporting). The GBP expounds voluntary process guidelines that recommend transparency and disclosure and promote integrity in the development of the green bond market by clarifying the approach for issuance of a green bond.
As pioneers in managing impact investing and fossil fuel free bond portfolios, Community Capital Management (CCM) incorporates the “environmental” and “social” aspects of ESG investing in multiple elements of our investment process including a use of proceeds analysis for all impact investments, green bonds included. For us, a threshold declaration of green intent by an issuer is a starting point.
We need to be able to identify, record, and track the underlying environmental and social activity that each bond transaction supports. In this regard, we use a combination of proprietary research augmented by third-party standards to ensure that the bonds support one or more environmental and/or social initiatives.
Our investment research includes an analysis of the components that ICMA recommends to bond issuers through the GBP:
- Use of Proceeds
- Process for Project Evaluation and Selection
- Management of Proceeds
CCM primarily invests in four sectors of the bond market where we employ a use of proceeds analysis… In this four-part blog series, we highlight some bonds in these sectors which have a “green” label by the state and/or issuer and some that do not. Even for those without the label, all the examples have significant positive sustainable outcomes. We classify these examples as sustainable or green investments because of our meticulous due diligence on the use of bond proceeds and our ability to track and document the underlying impact.
Visit our blog page again soon and look for Part II of this blog series—we’ll be diving into taxable municipal bonds that may be used to finance a variety of sustainable initiatives.