Guest essay by Eric Worrall
Green bonds – corporate borrowing to help finance improved energy efficiency, renewables, and other fashionable environmental activities, appear to be a growing trend. But there are concerns about transparency, about ensuring the money raised is spent as promised.
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 reining in global warming.
Apple’s $1.5bn green bond, announced last month, will fund several 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. A green bond, like a typical bond, is simply a way to borrow money, but it’s issued specifically to fund environmental projects.
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.
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.
Some of the proposed investments sound like things companies would have wanted to do anyway. For example, cooling data centres is an ongoing technical challenge. While there have been energy efficiency improvements, such as low voltage technology which produces less heat per computation, the overwhelming commercial incentive to stay on the leading edge of capability appears to be forcing the development of increasingly radical innovations.
Nevertheless I suspect delivery will become an increasing issue for green bonds. While I have no doubt of Apple management’s ideological commitment to green issues, I suspect some players will think of this new green fundraising trend as just another way to tap the markets. In addition, even when their intentions are good, many companies may have substantially underestimated their dependence on fossil fuels, which may also mean they have underestimated the cost of “going green”.
Activist investors will not be slow to demand action, if they believe they have not received the promised return on their investments. Even if a company pays the promised dividends on green bonds, investors may still be dissatisfied with environmental outcomes. If a company commits to outcomes, as part of their issuance of their green bonds, they might find themselves caught short, if the costs of meeting those commitments substantially exceeds the capital raised by the bonds.
Given the disastrous track record of many green investments over the last few years, it seems likely that at least some of these new green bond funded projects, however well intentioned, will not end well.