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14 As outlined in the previous chapter, although green bonds are similar to traditional bonds in many regards, there are specific costs associated with green bonds that differentiate them from traditional tax-exempt financing. Likewise, there are also specific financial benefits that transit agencies may want to consider when evaluating green bonds. The following section provides an overview of the financial and nonfinancial benefits of green bonds, which may help a transit agency attract a broader pool of investors, build a reputation for sustainability, and develop a sustainability culture. Attracting a Broader Pool of Investors Many parties interested in issuing green bonds are curious about whether they typically carry a premium. This âgreen premiumâ has been the subject of considerable research, and evidence is decidedly inconclusive. For example, several studies claim there is a pricing premium for green bonds, with evidence in the secondary market and anecdotal cases in the primary market (Climate Bonds Initiative 2019b, Cooper et al. 2017, Cooper 2018, Davies 2019, Hirtenstein 2017, Johansson 2019a, Kidney 2016, Ludvigsen 2015a, and Owen 2017). However, this is dis- puted among some market professionals (Buhr 2016, Chiang 2017, Climate Bonds Initiative 2018b, and Gilbert 2019). This inconclusive pattern also persisted in the interviews conducted for this project. Anec- dotally, some interviewees believe that they observed a slight financial advantage in comparison to a traditional bond issuance; others did not. None of the interviewees believe that they saw conclusive evidence of the existence or nature of a green premium outside of the anecdotal realm. This is not surprising; given that financial markets are incredibly dynamic, no two bonds are identical, and the definition of green is highly variable, it is exceedingly difficult to obtain sufficient data to quantitatively demonstrate a pricing benefit for green bonds. However, there are more tangible benefits associated with green bond issuance, despite the lack of evidence of a green premium. As discussed earlier, both the literature and interview data suggest that issuing a green bond over a traditional bond attracts a wider pool of investors. Investors with an interest in green bonds can be generally characterized in three ways: 1. Investors who are committed to supporting environmentally sound securities, therefore they seek out green bonds. 2. Investors who believe that issuance of a green bond is indicative of strong management and good corporate governance, which, in turn, mitigate risk. C H A P T E R 4 Benefits of Green Bonds and How Green Bonds Advance Sustainability Goals of Transit Agencies
Benefits of Green Bonds and How Green Bonds Advance Sustainability Goals of Transit Agencies 15 3. Investors who place no incremental value in the green element of the bond but are still interested due to the credit rating, tax-exempt status, or another reason (i.e., investors that would have been interested in the bond even if it was not green). This diversification of the investor pool provides an opportunity for the issuer to leverage the increased demand by sourcing capital at a lower cost. One interviewee noted a 30 percent increase in the investor pool for a green bond compared to similar previous traditional bonds. Additionally, some experts believe that in the United States, green bond uptake is limited by supply rather than demand. Consistent oversubscription for green bond issuance supports this theory (Chiang 2018). As previously mentioned, some interviewees believe this to be indica- tive of a larger trend in finance as funds are being transferred from baby boomers to younger generations. As the pressure mounts for issuers to incorporate ESG issues more effectively into investments, interviewees expect this trend to continue. Building a Reputation for Sustainability Among Relevant Stakeholders Interviewees discussed an increasing awareness of, and commitment to, sustainability issues among relevant stakeholders and constituents, which creates additional pressure on agencies and municipalities to demonstrate responsiveness to those priorities. By issuing green bonds, a transit agency can communicate to riders, employees, elected officials, investors, local or state transit agencies, and other constituents that the agency prioritizes sustainability. Interview participants also identified green bond issuance as an opportunity for transit agencies to make progress on their sustainability goals. Interviewees noted that transit agencies often developed green bond frameworks to build on existing planning documents or to respond to state or local directives. Green bond or sustainability frameworks served as the basis from which agencies could evaluate projects and begin issuing green bonds. For example, in its 2015 strategic plan, the Bay Area Rapid Transit (BART) highlights the need to advance regional sustainability and environmental efforts (BART 2015). BARTâs sustainability framework was adopted by the board in April 2017, and the transit agency issued its first green bonds in May of the same year (BART 2017). Interviewees found green bond issuance to be an ideal means for transit agencies to signal their sustainability commitment to the community, particularly considering the minimal addi- tional work required to issue a green bond instead of a traditional bond for most transit projects. Issuing green bonds provides a straightforward opportunity to protect an agencyâs social license to operate and burnish its organizational reputation, both within the metropolitan area and to outside constituents. Developing an Agencyâs Sustainability Culture By issuing green bonds, a transit agency can build or strengthen a culture of sustainability within the organization. Interviews with transit agency staff showed that the directive to either issue a green bond or develop a green bond financing framework often came from board mem- bers or agency heads. When agency leaders focus on sustainability, it signals to employees that the agency is prioritizing meeting sustainability targets and following through on a sustain- ability plan.
16 Analysis of Green Bond Financing in the Public Transportation Industry The decision to pursue green bonds was not a top-down initiative in all cases. During discus- sions with representatives from transit agencies, interviewees also mentioned several instances where agency staff had been integral in the push to issue the first green bonds and the develop- ment of green bond frameworks. Empowering staff by allowing them to take a critical role in the development of green bond frameworks can reinforce the value of sustainability. Just as green bonds can play a critical role in developing an organizationâs reputation with its external constituents, interview participants expressed that an agencyâs emphasis on green bonds can also further its internal culture of sustainability. The case studies in Chapter 7 provide examples of agencies leveraging green bonds to support a culture of sustainability.