By Andrew Poreda, ESG Research Analyst
The green bond phenomenon has taken the investing world by storm. Corporations, governments, and municipalities worldwide have leveraged green bonds to fund projects that benefit the environment while providing long-term value to the issuer. And investors can’t get enough of them – the green bond market is on track to more than double this year. Despite the popularity of green bonds, the largest issuer of debt in the world – The United States Federal Government – has been largely absent from the discussion.
What the U.S. has been talking about are a lot of projects that could be financed with green bonds. We’ve seen bold pledges from the U.S. on climate change, including carbon free energy by 2035, and a green infrastructure bill, so why not issue Green Treasuries to fund these initiatives? Maybe we should try taking a page from history and use the war bond strategy to fight a different kind of battle. A Green Treasury Bond that ties investor dollars to projects that have demonstrated positive environmental impact may be just what is needed to help achieve these lofty goals – and save the government and taxpayer money in the process.
Take Germany as an example. In May, Germany issued a 30-year green bond simultaneously with a conventional bond (known together as a “Twin Bond”) and the green bond sold at a 2-basis-point lower yield. The cost savings from the lower yield alone is a clear benefit to the German government and taxpayers alike. Would a Green Treasury have a similar “greenium”? Fortunately, the Treasury Department has so many examples to choose from, as 22 countries have already successfully issued sovereign green bonds. Many have been so popular that they were oversubscribed 5 to 10 times (similar to many green bond issuances globally), so no one has to worry that the demand will not be there.
Investors (who are also taxpayers) also shouldn’t have to worry about whether their taxes and investment dollars are being used for designated purposes. The Solyndra debacle is still fresh in many investors’ minds, where everyone was so blinded by the company’s green potential that it swindled over half a billion dollars from the government before all was said and done. With Green Treasuries, taxpayers would have another government watchdog in the form of the scrutiny by the investment community. Additionally, the Securities and Exchange Commission recently created a task force to crack down on greenwashing in investing, so it seems like the government now has the perfect opportunity to also demonstrate what green investing should look and act like.
Treasuries account for a staggering 38% of the investment grade U.S. bond market, which currently means that a large percentage of investment dollars are doing nothing unique from a sustainability perspective. Fortunately, all stakeholders stand to win from a Green Treasury. Sustainable-minded investors can fill the Treasury portion of their fixed income portfolio with proceeds-driven investments that have measurable environmental outcomes, and the U.S. government can use them to combat climate change. With the national debt at $28 trillion and rapidly growing, many are demanding that every dollar goes to good use. And maybe as importantly, the United States needs to demonstrate that it is a true leader on climate issues.
- Taylor, Madeleine. Green bond issuance on track to almost double in 2021, market estimates suggest. Institutional Asset Manager. January 26, 2021
- President Biden Sets 2030 Greenhouse Gas Pollution Reduction Target Aimed at Creating Good-Paying Union Jobs and Securing U.S. Leadership on Clean Energy Technologies. The White House. April 22, 2021
- The American Jobs Plan. The White House. March 31, 2021
- Bahceli, Yoruk. German 30-yr green bond bucks market selloff with record demand. Reuters. May 11, 2021
- Jones, Liam. Record $700bn of Green, Social & Sustainability (GSS) Issuance in 2020: Global State of the Market Report. Climate Bonds Initiative. April 23, 2021
- Segal, Mark. Germany’s Inaugural Federal Green Bond Issue Meets Strong Demand, 5x Oversubscribed. ESG Today. September 3, 2020
- Fatin, Leena. Sovereign Green, Social & Sustainability (SGSS) Bonds – How far and how fast could they grow? Climate Bonds Initiative. March 30, 2021
- Egypt is poised to ride 2021’s green bond wave. Enterprise. March 16, 2021
- Serenelli, Luigi. Italy records high demand for first green bond offering. IPE. March 4, 2021
- SEC Announces Enforcement Task Force Focused on Climate and ESG Issues. U.S. Securities and Exchange Commission. March 4, 2021
- Bloomberg Barclays U.S. Aggregate Bond Index (FactSet as of June 16, 2021)
- U.S. Debt Clock (as of June 16, 2021)
Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.
Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. For additional information on Sage and its investment management services, please view our web site at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.