Monday, January 4, 2016

Green Bonds: California Treasurer Chiang Explores Expanded Role

California Treasurer John Chiang will be embarking on a nationwide "listening tour" later this month to explore actions California might take to enhance the green bond market.

“We want to see what we can do at the California State Treasurer’s Office to unlock the potential of the green bond market and create a bigger market for these investment tools," said Treasurer Chiang.

California State Treasurer John Chiang

Treasurer Chiang is well positioned to enhance green bonds.  The Treasurer's office is part of the international standards setting body on green bonds, it has served as both a green bond issuer and purchaser and it is a well respected national and international leader on government finance and institutional investment.

Climate Bond Standards

Treasurer Chiang is a member of the international governance body overseeing standards for the green bonds market (the Climate Bond Standards Board).  In that role, he works with other experts to assure the integrity of the green bond and climate bond marketplace. The standards developed help issuers, investors and intermediaries to assess the environmental benefits of environmentally labelled bonds.  The standards also aim to provide common definitions of green projects across global markets.

Overview of Climate Bond Standard (more detail here)

To date, standards have been developed for several project types, including low-carbon buildings, solar, wind and bus rapid transit.  Future standards will be developed for other project types, including bioenergy, geothermal and others.

COP21 and Green Bonds

Treasurer Chiang's interest in boosting the green bond market is timely.

I attended a number of sessions on finance and energy solutions at the COP21 climate summit in Paris last month.  Green bonds were frequently mentioned as an important tool in generating the funds needed for climate action.  National and subnational governments were anxious to learn how they might tap the green bond market for local projects.

At COP21, 27 investors, ranging from CalSTRS to Calvert Investments to Zurich Insurance issued "The Paris Green Bonds Statement" pledging to support policies to improve the green bond market.  Frederic Samana of the giant international asset management firm Amundi summed up the state of the market:  "The green bond market is surging everywhere."

The London-based Climate Bonds Initiative is the de-facto hub for green bond activity worldwide.  According to their CEO Sean Kidney, there is enormous potential to use green bonds to improve infrastructure and develop clean energy projects.

California Green Bonds

California has already played a significant role in developing markets for issuing and purchasing green bonds.

By purchasing over $1 billion in World Bank green bonds, California showed there is significant demand for quality issuances. “We appreciate the California State Treasurer’s Office’s continued interest in World Bank Green Bonds," said Doris Herrera-Pol, Director and Global Head of Capital Markets at the World Bank.  "They were the World Bank’s first USD investor back in 2009 when we issued our first USD green bond. Now with over USD 1 billion invested in green bonds, they have been instrumental in helping grow the green bond market,”

California is also an issuer of green bonds.  A $300 million bond issuance in 2014 is being used primarily for clean transportation projects.  The bond was originally expected to be $200 million, but was raised to $300 million due to market demand. “California’s first green bond sale produced an outstanding result, generating such a strong demand that we expanded the sale by $100 million," said then Treasurer Bill Lockyer in September, 2014.

Treasurer Chiang released the first annual report on the use of proceeds from the bond.  The report (available here) shows that almost all of the proceeds have been disbursed (see chart below).  Similar annual reports will be issued until all proceeds have been disbursed.

Green Bonds Listening Tour and Next Steps

Treasurer Chiang plans to meet with municipal bond retailers, environmental-friendly investors and large investment funds in San Francisco, New York City, Boston and Chicago.  While in New York, he'll also serve as a Co-Convenor of the Investor's Summit on Climate Risk at the United Nations.

According to Treasurer Chiang, more analysis, fine-tuning and market research needs to be done before a green bond market can really take off.  “Greater use of green bonds could provide a secure and growing funding stream for governments and private industries to meet the challenge of curbing climate pollution."

In addition to the Climate Bonds Initiative, investors and bond industry representatives, Treasurer Chiang can expect active interest in his green bond activities from local governments and non-governmental organizations.  Several local government entities in the San Francisco Bay and Los Angeles areas have already issued green bonds.  And, organizations ranging from the Natural Resources Defense Council to As You Sow to CERES to CalCEF are expected to become increasingly engaged in green bond issues.