As Demand for Green Bonds Grows, So Does Desire for Transparency


There is growing demand for environmentally friendly investments, and as a result, “green bonds” have become an increasingly popular investment vehicle.

For proof, look no further than CalSTRS, which increased its purchases of “green bonds” by 300 percent in 2014.

But with increased popularity comes increased demands for transparency: what exactly qualifies as a “green” investment?

From Institutional Investor:

With green bonds’ rising prominence comes a need for a single set of clear and science-based criteria for what constitutes “green.” Nuclear power is low carbon, but some would balk at calling it green. And the coal industry would like investors to count fitting a coal-fired power plant with technology to reduce carbon emissions as a clean energy project, although fossil fuel consumption is hardly carbon neutral.

“When you get into the corporate space, you’re dealing with a large number of companies, and transparency is not always as good,” says Colin Purdie, head of global investment-grade credit at London-based asset management firm Aviva Investors.

None of this means Aviva wouldn’t invest in a bond because it doesn’t qualify as “green.” It just means the firm wouldn’t call it that. And therein lies the conundrum. A lot of these bonds would hit investors’ desks even without the green label. If the market is to grow into the large liquid powerhouse its proponents want, it needs a significant roster of corporate issuers to issue green bonds.

Also at issue are third-party verifications proving that issuers are spending funds on the environmentally friendly projects the bonds were designed to finance. This has begun to happen already. More than half of the green bonds issued in 2014 included an independent second opinion on their environmental credentials, from watchdogs such as the Center for International Climate and Environmental Research in Oslo and Vigeo in Paris, according to data from the Climate Bonds Initiative.


“I think the biggest concern right now is trying to grow the market and getting more issuers to issue bonds,” says Catherine DiSalvo, investment officer at the California State Teachers’ Retirement System. “We do support third-party verifications. The only problem is that it adds to the expense of issuing a green bond.”

Read the whole piece on green bonds here.


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Pension Official: Here’s How Congress Could Make Investing in Environmental Projects More Appealing to Pension Funds

windmill farm

Girard Miller, CIO of the Orange County Employees Retirement System, sat down with Governing magazine yesterday to talk about what’s holding many public pension funds back from taking on “green” investments.

Miller first explains the concept of “green bonds”. From the Governing interview:

These are bonds issued to finance environmentally friendly capital projects. One use of the concept applies very narrowly to tax-exempt bonds for what are called brownfields development. Then there is also an international working group promoting “climate bonds,” which are sometimes called green bonds. CalSTRS, the large state teachers pension fund here in California, is part of that working group. The central idea is to reduce the carbon footprint globally through infrastructure projects that can be funded through big bond issues. I use the term green bonds very broadly to include essential environmental projects that might be funded by states and localities through bond financing. Beyond carbon reduction and water conservation in drought areas, I’ll leave it to the policy geeks and public finance guys to haggle over the definition. It’s a big tent.

Miller goes on to talk about the problem with “green bonds”: they are tax-exempt, and, in his words, pension funds “don’t want tax-exempt paper in their portfolios.”

But he says Congress can fix that problem, and in the process make the bonds more appealing to some of the world’s largest institutional investors. From the interview:

The problem is that pension plans don’t want tax-exempt income. We’re not the only ones. Sovereign investment funds from abroad, such as those in China and the Middle East, and endowment funds don’t care about taxes either.


What we need is a taxable option to be approved by Congress and limited to green bonds, not to every conceivable capital project, which is typically what happens when politics gets involved. A taxable bond option (TBO) is a concept that has been kicking around in public finance circles for four decades. As far back as the 1970s, economists like John Petersen were saying there is a smarter way to do this stuff. Build America Bonds, which were authorized in 2009-2010 at the bottom of the Great Recession, were a taxable option. A TBO allows, but does not require, a muni bond issuer to elect to pay taxable interest and receive a direct interest-cost reimbursement from the U.S. Treasury rather than the indirect subsidy of tax exemption. In most cases, that would mean a lower borrowing cost — net-net — than issuing tax-exempt bonds. For pension plans, a TBO-yield will compare favorably with corporate credit and foreign sovereign bonds, plus the bonds would be a diversifier for our bond portfolios. Foreign investors and endowment funds, as well as ordinary investors with incomes below $200,000, would prefer taxable municipals.

Read the whole interview here.


Photo by  penagate via Flickr CC

CalSTRS Doubles Down On Clean Energy Investments

smoke stack

At least one pension fund is seeing the potential for “green” (read: big money) in clean energy investments.

CalSTRS announced plans to significantly ramp up investments in the “green” sector from $1.4 billion to $3.7 billion over the next 5 years. AP reports:

CalSTRS CEO Jack Ehnes says the pension fund is seeing more opportunities in low-carbon projects and technologies. The fund is hoping also to help push for stronger policies aimed at fighting climate change, Ehnes says.

If policies are adopted that impose a price on carbon emissions to discourage pollution, the fund could increase its investments further, to $9.5 billion.

The fund has a $188 billion portfolio.

The clean energy and technology investments will be made through holdings in private equity firms, bonds, and infrastructure as suitable investments come available, the fund says.

The move comes on the heels of calls in recent years for pension funds to divest from fossil-fuel dependent investments. From the Financial Times:

At least 25 cities in the US have passed resolutions calling on pension fund boards to divest from fossil fuel holdings, according to figures from, a group that campaigns for investors to ditch their fossil fuel stocks.

Three Californian cities, Richmond, Berkeley and Oakland, urged Calpers, one of the largest US pension schemes, with $288bn of assets, and which manages their funds, to divest from fossil fuels. Calpers has ignored their request.

Calpers said: “The issue has been brought to our attention. [We] believe engagement is the best course of action.

No pension funds have yet divested from fossil fuel-dependent investments for social reasons, including CalSTRS.

But you can expect pension funds to go where they think the money is; in the case of CalSTRS, they are seeing “green” in clean energy going forward.


Photo: Paul Falardeau via Flickr CC License