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12 Costs Additional costs are incurred in the process of issuing a green bond compared to a tradi- tional bond, but these additional expenses are minimal relative to the typical size of a transit bond issuance. An agency that is considering launching a green bond for the first time should expect some upfront costs to develop internal policies and processes. There will also be some additional costs incurred on a project-by-project basis. The first instance of green bond issuance for an organization carries a higher burden of cost. Initial costs relate to the internal decision-making, process development, and learning required to identify appropriate projects, develop a prospectus, and establish a tracking system to satisfy use of proceeds reporting. For example, an agency needs to decide how it will judge whether a project is green. The agency will need to ensure that its accounting system has adequate controls to track whether the proceeds from the issuance are spent on designated projects. Finally, most interviewees indicated that their organization had established a sustainability strategy and goals prior to developing their first green bond issuance. Though some upfront investment is needed to issue a green bond, it is typically not prohibitive in relation to the size of most transit bond issuances, and the established processes can be applied to future issuances. Interviewees were also aligned in noting that there are additional project-specific costs, but that they are minimal. Interviewees noted that their typical additional cost to issue a green bond (not counting third-party verification) was about $10,000, as the reporting requirements are only slightly more stringent than those already associated with municipal bonds. These costs were associated with the staff time required to develop the disclosures necessary to be aligned with the GBP, and they are likely to be broadly similar across agencies. Beyond costs associated with reporting, additional costs are variable and dependent upon the organizationâs strategy. Self-labeled bonds might not undergo an external review or validation, so additional costs are limited to the actions that agencies decide are necessary. If issuers are concerned that the market might not receive an issuance positively or believe that the legitimacy of an external review or validation will help them attract additional investors, they may hire a third party to review or validate their issuance. In this case, there are additional costs associated with that review or validation. These costs vary from case to case, but even when combined with reporting costs, interview participants reported that they are still not prohibitive in com- parison to the total size of the bond issuance. Risks Additional risks associated with green bond issuance in comparison to traditional bond issuance are minimal. The disclosures that differentiate a green bond from a traditional bond are voluntary and unenforceable. C H A P T E R 3 Costs and Risks of Green Bonds vs. Traditional Bond Financing
Costs and Risks of Green Bonds vs. Traditional Bond Financing 13 Several interview participants did point out the risk of reputational damage from providing misleading information about the environmental impacts of a bond issuance. Misleading the market about an issuance in this manner is referred to as âgreenwashing.â If a green bond issuance is poorly received by the market because its projected environmental impacts are thought to be exaggerated, unlikely, or incorrect, the issuer opens itself up to accusations of greenwashing. These accusations can damage the issuerâs organizational reputation and credibility, which can negatively impact future offerings. This risk can be mitigated by ear- marking bond proceeds to ensure that they only go to identified green projects, adhering closely to the GBP, and communicating effectively and transparently about the impacts of the initiative with investors. Greenwashing is particularly important to consider for issuers that are self-labeling their bonds, as they do not have the added protection of a second opinion that could confirm an agencyâs claims or flag concerns. If an organization elects to self-label, it should prioritize trans- parency and rigorous reporting to ensure effective communication of project impacts and mini- mize the risk of greenwashing. One risk that many potential issuers share is that of clawbacks or penalty provisions, which require payment of a penalty if the advertised environmental benefits are not achieved. There is no evidence of clawbacks being a serious threat to green bond issuances in the literature, and no interviewees had seen this occur in practice. However, it is worth noting that a newer class of instruments (results-based financing, discussed in Chapter 5 of this report) does attach additional payments based on whether desired impacts were achieved.
