For me, a bit of wonderment has accompanied recent discussions about the potential enhancement of the profile of municipal bonds due to the designation of certain bond issues as “green.” Green bonds are bonds whose proceeds are specifically earmarked for projects and activities that promote climate and other environmental or sustainability purposes. The use of bond proceeds is the main factor differentiating a green bond from a non-green bond.
Municipal bonds provide state and local governmental entities with the intent of offering a public benefit through access to U.S. capital markets. These benefits accrue to delivering potable and clean water, sanitation, power (electricity), transportation, pollution control, education, housing, and health care, to name a few. So what could be more socially responsible and “green” than the municipal asset class?
According to Bank of America Merrill Lynch (BAML) in a November issue of its Municipals Weekly: “Since green bonds officially debuted in the U.S. municipal bond market in June 2013, roughly $1.6 billion of green bonds are scheduled to, or have been issued.” While still a nascent market, the applicability and suitability of green bond issuance for municipal issuers is endless.
The authors readily agree that, for the most part, munis are generally believed to be green, and the primary difference between green bonds and muni bonds exists in the use of proceeds. Whether it’s the full faith, credit, and taxing power attributed to general obligation bonds, or the pledge of gross or net revenues from revenue bonds, both provide a level of security for these and the other approximately $3.7 trillion of bonds in the muni universe1.
Further reading of the BAML discussion details how municipal issuers can use green bond proceeds. According to the Green Bond Principles, issuers can use them for: renewal energy, energy efficiency, sustainable waste management, sustainable land use, biodiversity conservation, clean transportation, and clean water and/or drinking water.
I believe that investors, already familiar with the benefits of muni investing, applaud such a noble assertion. As far as I can tell, however, there are virtually no incremental benefits for the investor or issuer, save for the psychological effect that those baby boomers or even the millennials may derive as they collect their coupons.
All of this leads me to wonder whether the industry hasn’t wasted some time and money to “touch up” an asset class with a new coat of paint though fundamentals remain otherwise unchanged. It seems to me the chosen paint color is green.
1Source: SIFMA data. Amount outstanding as of 6/30/2014.