Renowned for its lavish plantings and exuberant orchids, Longwood Gardens is going green in a new way: ‘Green Bonds’.
Its $250 million renovation is funded by a combination of grants, endowments and a tax-exempt “green” bond issue for $200 million in 2021.
It’s traditional for businesses, cities, and nonprofits to fund projects with bonds, which are essentially loans from investors that promise to repay the principal with interest. But Longwood uses a fast-growing tool – green bonds – which are marketed to investors who aim to support environmentally friendly projects.
That market grew to just over $500 billion in green bonds issued globally last year, up from $100 billion in 2017, according to the Climate Bonds Initiative, a group that standardizes what qualifies as a bond. green. Standard & Poor’s predicts global green bond issuance will exceed $1.5 trillion in 2022.
Who buys “green” bonds?
These days, family investors are increasingly asking their portfolio managers to put money to work in businesses that also benefit the planet. But institutional investors with mandates to invest money with strong ties to ESG, or environmental, social and governance-related projects, are the primary client.
And with the infrastructure bill in Congress, more municipalities could seek to fund projects using “green,” “climate,” “social,” or “sustainable” bond labels.
The definition can be slippery. Some experts say ‘climate’ bonds refer to all bonds, loans or other debt compliant with the Climate Bonds Initiative, while ‘green’ refers to specific bonds, loans or other debt issued to finance projects that advance environmental goals and policies. .
The International Capital Market Association, a Wall Street trade group, offers voluntary standards defining “green”, “social” and “sustainable” bonds.
Others label themselves, like California-based bond investment manager PIMCO, one of the world’s largest fixed-income securities.
PIMCO defines the market this way: green bonds include “renewable energy, efficiency, clean transportation, green buildings, wastewater management and climate change adaptation.”
To qualify as social linkthe money must be used to achieve positive social outcomes, or target populations living below the “poverty line, marginalized communities, migrants, unemployed, women… or sexual and gender minorities, people disabled and displaced persons”.
Sustainable bonds to aim both environmental and social impact.
In the garden’s case, CFO Dennis Fisher said the money is funding the “Longwood Reimagined” expansion, which aims to modernize former chemical tycoon Pierre S. DuPont’s family estate, now a botanical complex. and conservatory open to the public.
The issuer is the Chester County Industrial Development Authority, and the $200 million is referred to as a “sustainable” bond.
For Longwood officials, the bond offering is a different way to plant seeds and further its mission. And the group has worked to have its bonds qualified as green.
“This industry is maturing as it goes,” said Eileen Perpiglia, associate vice president of accounting and finance at Longwood. Longwood has retained Kestrel Verifiers as its second-party reviewer, a certification company that determines whether an offering is truly “green” — or just “eco-friendly.”
Among 17 possible sustainable goals, Longwood successfully checked off qualifying categories that included advancing high-quality education, clean water and sanitation goals; sustainable cities and communities and responsible consumption.
Kestrel CEO Monica Reid confirmed that there has been huge demand among ESG investors since 2013, when Massachusetts became one of the first states to label a municipal issuance a green bond.
“While still a small part of the market, investors are demanding a more climate-focused focus,” she said.
Is there a financial benefit to getting a seal of approval from a certifier?
“Sometimes there’s a price advantage” with a lower interest rate or greater demand for bonds, Reid said. An external reviewer “brings in new ESG investors. They generally don’t look at Chester County Industrial Authority, the Longwood transmitter. But green bonds with a Kestrel stamp on them? New investors are looking at this,” she said.
And Wall Street sees a new source of fees. Van Eck launched the VanEck Vectors Green Bond ETF (GRNB) in 2017, followed a year later by iShares with its iShares Global Green Bond ETF (BGRN).
Bond rating agency Moody’s gave Longwood’s 2021 bond issue a strong Aa2 rating, citing a “good brand and strategic position as a premier public garden located on 1,100 acres in the greater Philadelphia area. , typically with over 1.5 million visitors per year.
It helped that Longwood’s outdoor activities remained open during the pandemic.
It should be noted that municipal bond issuers in green finance can only use the proceeds for the intended purpose, Reid said. Longwood has also pledged to document how it uses the money with annual reports through the online bond pricing database EMMA, operated by the City Securities Regulatory Council.
Does the “green” label mean better yields?
“There really isn’t enough data or supply to tell yet,” said Melissa Winkler, senior vice president of sales and strategy at Kestrel. “The sample size is still too small. The muni market is already considered a high quality market. Compared to a single-A company, a single-A muni is stronger” because of government support, Winkler said.
Interest rates on recent Longwood bonds have totaled 3.24% for a 2019 bond issue and 2.68% for the 2021 issue.
Wharton finance professor Luke Taylor co-authored a 2021 paper, “Dissecting Green Returns,” and found that “green” investments in stocks and bonds outperformed.
But Taylor and his colleagues Lubos Pastor of the University of Chicago and Robert Stambaugh of Wharton wrote that if not for the huge inflows of funds and the hysteria of the climate headlines, investors in “green factor” stocks would have lost out. money over the eight years to 2020.
“Should the recent outperformance of green equities lead to expecting high green returns in the future?” they wrote. “No, we are arguing. This outperformance likely reflects an unforeseen increase in environmental concerns. In theory, yields could drop in the future.
Meanwhile, other states, such as Delaware, are reviewing green bonds after one in 2020, state treasurer Colleen Davis said. She recently hosted a roundtable with issuer Delaware Sustainable Energy Utility.
Thomas Beckett, senior vice president of NW Financial, a municipal government finance and underwriting company, told the panel that green bonds are likely to proliferate “as more issuers integrate energy efficiency, sustainability and resilience to climate change in their capital expenditure”.