On the surface, green bonds seem counter intuitive: why would a company willingly take on debt to finance environmental efforts? But Apple’s recent decision to issue its first green bond suggests that this type of investment could play a key role in reigning in global warming.
Like a typical bond, a green bond is simply a way to borrow money. However, green bonds are issued specifically to fund projects that have positive environmental impact.
Apple’s $1.5bn green bond, announced last month, will fund several environmental initiatives, including the company’s conversion to 100% renewable energy, installation of more energy efficient heating and cooling systems and an increase in the company’s use of biodegradable materials.
Apple’s green bond reflects a growing corporate concern about the economic impact of climate change. Businesses are responsible for the majority of manmade greenhouse gas emissions, which are driving up average temperatures worldwide and affecting many companies’ bottom lines. Some, including Apple, are realizing the need to invest in environmental resources, such as watersheds or forests, to protect the sources of their products.
Lisa Jackson, Apple’s vice president of environment, policy and social initiatives, told Reuters that the company decided to issue its green bond after December’s UN Climate Summit in Paris, during which hundreds of companies pledged to fight climate change. With its bond sale, Apple has become the largest US company to have issued a green bond – although Toyota still holds the crown for the largest corporate green bond ever offered in the US with its $1.75bn green bond issued in 2014.
The green bond market is still in its infancy. According to Climate Bonds Initiative, a UK nonprofit that tracks the market, the first green bond was issued in 2007, and the first corporate issuance didn’t come along until 2013. Since then, a handful of high profile companies have jumped on the bandwagon, including EDF, a French power company, and Bank of America, which used the proceeds to loan money to cities and other businesses for installing solar panels, wind turbines and LED lighting.
For global companies, changing operations to deal with the impact of climate change requires a lot of time and money. As a result, many companies have traditionally been unwilling to invest in renewable energy or other climate projects without a significant return on investment. For example, Apple will need to raise billions of dollars to achieve its ambitious plans to reduce its environmental impact. Last year, it committed to spend $848m over 25 years to buy enough solar-generated electricity to offset all the electricity used in its corporate and retail operations in California.
While green bonds have commonly been used to fund renewable energy projects, an increasing amount of money is going to projects that help offices and other buildings use water and other energy more efficiently, said Andrew Whiley, a spokesman for Climate Bonds Initiative. Electric cars and low-carbon transportation also are becoming popular, he added.
Globally, the green bond market is expected to keep growing. According to Climate Bonds Initiative, the market, including government-issued bonds, reached an all-time high of $41.8bn in 2015, up from $36.6bn in 2014 and $11bn in 2013. Financial services company HSBC predicts between $55bn and $80bn worth of green bonds will be issued around the world in 2016, while the Climate Bonds Initiative believes sales will exceed $100bn.
Toyota’s green bonds demonstrate a growing investor interest in transportation in particular. The company has issued two green bonds totaling $3bn since 2014, and has used the money to fund leases and loans for its fuel efficient cars, which it defines as those that get 35 miles per gallon or use hybrid engines.
Clinton Moloney, sustainability advisory leader at PricewaterhouseCoopers, said that as the effects of climate change become more devastating and widespread, green bond projects could grow more complex. For instance, proceeds can be used to build a seawall to help protect the San Francisco Bay from rising sea levels, or to restore marshlands that help to soak up runoffs during a big storm.
“We can do environmental projects that use concrete and steel, or we can think of nature based solutions as well,” Moloney said. “Evaluating those projects needs to be more sophisticated. That’s where we’re headed.”
Another issue facing green bonds is transparency. For investors who aren’t only interested in making money, figuring out the environmental impact of their investments while ensuring that the money is spent as promised can be difficult to accomplish. As a result, a number of organizations have come up with rules and metrics to help both corporate borrowers and investors track and understand how the money is spent.
One such effort comes from the International Market Association, which has worked with investment banks or other investment firms such as JPMorgan Chase, BlackRock and World Bank to create a set of guidelines called the Green Bond Principles. The guidelines define the types of environmental benefits that could be covered by a green bond, such as reducing pollution or conserving wildlife. They also recommend an annual reporting by the bond issuers on how they use the proceeds.
“The more confidence investors can feel in the green bona fides of a project, the better the marketplace will operate,” said PricewaterhouseCoopers’ Moloney.
For its part, Toyota is communicating directly with investors to keep its green bonds transparent. To show investors that the money from its green loans is being spent properly, it publishes a monthly report to show the amount spent on financing leases and loans for qualifying models, such as the Prius.
“Investors were able to see how the funds were being deployed and make their own determination, [and] whether it was consistent with what we had promised,” said Adam Stam, national manager of secured funding at Toyota Financial Services.