Red states, blue states and green bonds

The rise of ESG investing is saving some governments money and costing others more.

Photo by Kelly Sikkema on Unsplash

Happy Finance Friday, readers!

I’ve been writing about green bonds in the municipal market for a number of years and have typically been wary of claims that “this is the year” they’ll become a major part of the market. In this newsletter, I won’t make any predictions about their future growth, but I do see the potential for a division within the world of green bonds. 

In an article I wrote this week for Route Fifty, I highlight recent research indicating that issuing green bonds is becoming cheaper than issuing other types of bonds. But thanks to the political ideology around climate change, this benefit may only be limited to governments whose leaders embrace climate-friendly policies.

The emerging ‘greenium’

In the municipal market, green bonds typically fund projects with clear, definable and measurable environmental benefits. Think: energy efficient building upgrades, water conservation projects or renewable energy projects. Massachusetts was the first state to issue green bonds a decade ago, followed by California and New York in 2014, with more states and localities joining in subsequent years.

Even so, green bonds still constitute a small portion of the $4 trillion municipal market, estimated at less than 2%. However, they make up a substantial 30% share of the total U.S. green bond market, according to Refinitiv. 

Explore the data

Refinitiv Whitepaper on ESG bonds in the US Municipal Bond Market

Fidelity Whitepaper: Green is the New Black

One of the significant issues hampering the growth of municipal green bonds—and efforts to define their financial benefits for government issuers—has been the lack of standardization. The definition of what qualifies as “green” isn’t consistent across all issuers, investors hold different points of view on the matter, and there are even varying global standards.

• Climate Bonds Initiative’s climate bond certification 

• International Capital Market Association’s green bond principles

But in my Route Fifty story, I note that recent years have seen a growth in governments seeking certification for their green bonds, while at the same time, new research shows the cost of issuing green bonds has declined compared to their non-green counterparts. While it’s not a big discount, the paper’s authors note that this discount—called a “greenium”—is increasing.

Some of the reasons for this are expected: Green bonds are very popular with investors and tend to be oversubscribed; interest in sustainable investing overall has increased in recent years.

But the main reason for the discount? It’s coming from the folks who package the bonds and sell them in the muni market. The paper’s authors hypothesize that underwriters are doing this because green bonds are easier to sell. It makes sense—like a nice house in a hot market, realtors don’t have to work very hard to generate multiple offers in a short amount of time, and green bonds are attractive.

But this reasoning also implies that we could see a real division in which governments ultimately benefit from this easy marketability and emerging greenium.

Red, Green and Blue 

More than a dozen Republican-led states have taken a stand against the trend toward environmentally and socially conscious investing (ESG) in recent years.