Assessing the potential for U.S. utility green bonds
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EXECUTIVE SUMMARY: Bonds are the largest single class of financial instrument across the world’s financial markets. Recently, a subclass of these bonds, called green bonds, has emerged in the market place. Green bonds are a type of bond whose proceeds may be used only for certain approved “green” investments. In exchange for agreeing to invest only in such projects, the bond issuer obtains some value greater than they would obtain from traditional financing, and are therefore encouraged to finance and undertake a greater number of green projects. This unique value may not be recognized in traditional financial accounting. Of course, like any other capital-raising investment, green bonds enable their issuer to finance a new project that should increase (or at least maintain) its revenues, profits, and cash flow. The utility sector was the second largest issuer of green bonds in 2017, accounting for $26.2 billion dollars’ worth of green bond issuance globally. These were primarily issued to finance renewable energy projects, a class of projects that makes the utility sector one of the most logical for deployment of green bonds. While choosing to issue green bonds does not seem to have any price advantage over regular bonds in the market, green bonds can provide other benefits. These benefits may include reputation effects, better treatment in secondary markets, and other intangibles (See Table ES1).