Disclosure concerns cause some issuers to balk at green bond label

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SANTA MONICA, Calif. — Despite the enthusiasm displayed for climate-friendly projects at this week's Green Bonds Symposium here, some issuers are choosing not to seek out the green label for their bonds even when funding projects that clearly have environmental benefits.

The cost of certification, which can range from $25,000 to $35,000, and additional work and disclosure over the life of the bonds about the project’s environmental benefits were cited as potential hold-ups.

Issuers and their bond counsel are also concerned a project's green credentials could be challenged if they fail to meet compliance and reporting expectations.

“Many bond counsel are discouraging their clients from issuing green bonds, saying there is more downside to being called out for not being green than upside,” said Peter Ellsworth, director of the Investor Network for Ceres, who moderated a panel on green bond market expectations.

These issues are exactly the hurdles that California Treasurer John Chiang said he hoped to resolve when he organized the two-day event in partnership with confernce host the Milken Institute, a public policy think tank, and Environmental Finance, a London-based publishing company that reports on green finance.

The price tag of replacing the infrastructure powered by fossil fuels with low-carbon alternatives that the signers of the Paris committed to is pegged at $8 trillion for the U.S. alone, Chiang said in his keynote speech. The Golden State faces a “funding gap of $359 billion dollars over the next 10 years in meeting its public infrastructure needs,” Chiang said.

Paying for these investments is a challenge of the first order; and the bond markets – specifically green bonds, "are an essential tool in raising the capital necessary to finance our transition to a low-carbon economy,” Chiang said.

Scientific research has established an irrefutable link between global warming and human activity, Chiang said. “California is committed to moving forward and I am committed to finding a way to pay for it,” he said.

The first day of the conference was a brainstorming session of sorts between environmental advocates and the bankers, investors, lawyers and rating agencies who work in the U.S. municipal bond industry. It also included bankers and investment firms from countries ahead of the U.S. in using the financing tool to power climate-friendly projects. The second day was a series of panels on topics discussed.

“Think of a hack-a-thon, but instead of gathering computer experts to crack complex code, we convened global leaders in climate science, public policy and the capital markets to break the back of the problems outlined in my first green bonds report,” said Chiang, whose staff plans to release a second report outlining the results of the first-day Innovation Lab within 60 days.

The U.S. is in a unique position to take this market forward and hasn't touched the tip of the iceberg, said Justine Leigh-Bell, director of market development for the Climate Bonds Initiative, who spoke on a market expectations panel.

Investors are complaining that there is not enough supply to meet the demand, Leigh-Bell said.

U.S. issuance of green bonds grew 43% to $10.4 billion in 2017 and could top $15 billion in 2018, according to a S&P Global Ratings report released Thursday.

Speakers argued that although the issuance of green bonds may require additional reporting and auditing requirements, the advantages outweigh the disadvantages.

“There is definitely a transformation going on in the capital markets,” said panelist Heike Reichelt, head of investor relations and new products for the World Bank. “There is much more need to focus on social impact for everything we finance. Muni issuers have a lot of incentive, because their retail investors are also voters.”

The bonds offer governments the opportunity to demonstrate a commitment to environmental goals and capitalize on the interest in investing in socially conscious financial models, Reichelt said.

Though the industry has made headway in coming up with standards, it still lacks a uniform method of measuring whether a project would have the expected environmental benefits.

“We need more conformity and standards. I prefer to do my own assessment as to how green a bond is, because using someone else’s metric is just another risk, because someone could come in 10 years from now and say the bond isn’t green anymore,” said Ksenia Koban, a vice president at Payden & Rygel Investment Management, who spoke on an investor panel.

The industry has not been able to document that issuers receive preferential pricing for taking on the perceived risk of issuing green bonds, but for smaller cities there are more investors, which is definitely an advantage, said Nicole Martin, green evaluations analytical coordinator for the Americas at S&P Global Ratings.

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