Green bonds are going to be a big deal.
We are very well on our way towards a world where many people care about environmental sustainability, climate change, and carbon, and it becomes very obvious when traditional money starts moving heavily towards investing in technologies and companies that fit within this new worldview.
In real estate, this is coming in the form of green bonds. So what is a green bond? We get this definition for Investopedia:
A green bond is a fixed-income instrument designed specifically to support specific climate-related or environmental projects. The
Greens and money to represent a green bond. By Towfiqu Barbhuiya
Let’s take a step back so we can fully understand what a green bond is.
Firstly, a bond is a contract or promise by a borrower to pay back a lender. It is essentially a fancy word for a loan, but with one difference. Loans are typically from one source, while bonds are loans designed to be sold to the public, thus making them tradable on the open market. We hear about government bonds all the time as a safe investment because no matter how the market changes, the bond will always pay out the same amount of interest, assuming the government, or whomever the bond issuer is, is good for their word.
A green bond is a bond that is related to the environment and sustainability in some way. From a company’s perspective, it is a loan that a company would take where the company needs to hit certain environmental metrics, otherwise, there will be penalties. From the investor’s perspective, it is not only an opportunity to make their money do something good, but companies and projects that are focused on the environment and sustainability likely have a longer-term outlook, thus lowering potential risk.
I was introduced to green bonds in 2017 when I first heard about Swire Properties well on its way to implementing one1. In 2018, they raised $500 million USD at a coupon rate of 3.5% due in 2028. With a green bond, instead of just borrowing money, there are a bunch of additional requirements included on top of it. Swire specifically used the Green Bond Principles for their green bond, which includes the four key pillars below:
- Use of Proceeds
- Process for project evaluation and selection
- Management of proceeds
The green bond is very attractive because of its coupon rate, which is extremely low, offset by how some of the investments made might not have an immediate ROI. The incentive to spend this money wisely is due to that failure to implement accordingly can cause hikes in the coupon rate and other penalties.
As for green bonds in other industries, I did some Googling (and landed here) as to what other green bonds there are in the market and this is what I found:
- Tesla issued a $600 million USD bond in 2013 with a coupon rate of 1.5%-2%. This is an example of a private enterprise issuing a generic bond, but because they are an EV company, it’s being called a green bond.2
- Governments are offering green bonds to specifically finance projects focused on low carbon transition. This allows them to use the funds for investment towards solar power, transportation, deforestation, etc.
- There are now Index and Managed funds on the open market that are invested specifically into companies that have some kind of green angle to them. For example3, Bloomberg Barclays MSCI Green Bond Index includes both labeled and unlabeled investment-grade bonds with requirements on the use of proceeds. The S&P Green Bond Index, using a different set of criteria, screens only for bonds that are labeled by the Climate Bonds Initiative.
All this is to say that green bonds are still very nascent.
A strong deer to emphasize power.
There is a very unique factor to green bonds. That new factor is “green” metrics. Have you ever wondered why ESG (Environmental, Social, and Governance) metrics are so hot right now? In many ways, ESG is a rebranding of CSR (corporate social responsibility), but it makes a lot more sense to start a fund focused on ESG than CSR, therefore, branding goes where the money goes.
With the additional factor of “green” metrics, we now have new numbers to play with. These numbers are data points that Investors and funds can leverage to better understand trends and look for new investment opportunities. Because of the additional reporting requirements, investors and funds can now see how and how much money is being used on the ESG front and how it’s impacting their bottom line. This is becoming more relevant as more and more investors are looking at a longer time horizon than before.
This new factor is providing power to investors in the form of data and creating an incentive for companies to invest in global sustainability, as well as their own sustainability.
We’re getting to a key point now, which is data. The two frameworks or standards most commonly used today for green bonds are:
- Green Bond Principles
- Climate Bonds Initiative Both of them have reporting requirements that basically end at “you must report” and the reporting metrics are essentially self-defined by the green bond issuer.
ESG metrics are similar. There is a myriad of frameworks and standards out there right now (the most well-known are probably GRI, TCFD, and SASB), but they are all designed as holistic and all-encompassing frameworks that end up doing a lot and very little at the same time. They do a lot because they are standardizing a framework that can be used to compare projects against each other. They are at the same time, doing very little because a lot of these metrics are probably not as important as we think, but because the data points they really want are not there yet or easily accessible, this is the best we can do.
Because the data is hard to get, we are also limited in how strict the requirements are. Most of the data we get in ESG is self-reported. Recently, the Chinese government caught a bunch of Chinese firms falsifying the data they were reporting4 because there were tax incentives. Trustworthy data is hard to come by when data is so expensive in the first place.
Additionally, almost all of it is snapshot data. Of course, for the real estate market, 1 data point per day is likely to be already pretty good, but can you imagine trading on the stock market when there is only 1 data point per day? Or even worst, one data point per year? It goes to show how behind data gathering is in the real estate industry.
I mentioned in a previous article that a carbon tax would only work if data was easy to collect and highly accessible. It stands true with ESG metrics as well. If we want ESG metrics to be ubiquitous, we need standards and frameworks that make it very straightforward as to:
- what data needs to be collected,
- how it needs to be collected,
- how it should be verified for trust, and
- how to make it highly accessible (to the right people).
Disclaimer: I am the President of RESET. If you don’t want to read the plug, you can skip this section, but conceptually, it is quite important.
RESET is a data standard with the purpose of promoting healthier and more sustainable built environments. Our data standard essentially sets a framework for the above: what, how, how to verify, and how to make it accessible. We also break it down into embodied data and operating data, one pertaining to the construction phase of the building while the other pertains to the operating phase of the building. Someone recently described RESET as a performance and evidenced based standard instead of a feature-based standard. Essentially, RESET is here to help you measure and collect data about your built environment.
Green bonds for real estate will need data. In real estate, the most well-known ESG framework right now is GRESB, establishing a benchmark in the industry. RESET wants to be there to help projects collect the nitty gritty data that will be leveraged not only for future reporting, but also for targeted and optimized solutions.
RESET includes 5 modules:
- Materials (for embodied data)
- Air (continuous monitoring for occupant health)
- Water (continuous monitoring for water conservation and water quality)
- Energy (the most direct way to understand operating carbon)
- Circularity (continuous monitoring for waste management)
These 5 modules are able to provide a holistic approach to collecting the real-time performance data of a building. If green bonds require reporting that is trustworthy and accessible, there is no better approach than standardized, third-party verified, continuously monitored, performance data.
Flowing, cascading waterfalls to highlight our conclusion. By Mike Lewis
In real estate, green bonds and ESG investors and funds are being driven by Europe, especially Northern Europe, and they have had a cascading effect on the entire industry. More companies are asking for ESG data than ever before, which then opens the opportunity for more green bonds. As this cycle of money and data continues to roll, we will see a growing ESG and green bond market. Climate change is not going to solve itself, so having this flywheel in place is going to be really beneficial over the next couple of decades for humanity.
RESET is a set of standards and assessment tools & services to develop actionable, long term strategies towards health and sustainability for the built environment.
Learn more about RESET.
Swire Properties Green Finance: https://www.swireproperties.com/en/sustainable-development/performance-economic/green-bond.aspx ↩
Tesla “Green’ bond: https://www.climatebonds.net/2014/05/tesla-issues-600m-5yr-ev-convertible-bond-reminder-join-our-green-sukuk-webinar-thurs ↩
Text taken from https://greenportfolio.com/blog/understanding-green-bond-funds/ ↩
China slams firms for falsifying carbon data: https://www.cnbc.com/2022/03/14/china-slams-firms-for-falsifying-carbon-data.html ↩