At a gathering in Sacramento, Chiang signed the Green Bond Pledge — a declaration green bond supporters have been promoting since March. The California Governor and Treasurer’s Offices were among the originators of the pledge, along with groups including the Climate Bonds Initiative and Ceres, the investor coalition.
The pledge commits the signatory to making all infrastructure and capital projects climate-resilient, and where relevant, supportive of reducing greenhouse gas emissions. Signers also promise to foster the green bond market and develop a strategy to promote it.
In a highly political occasion that was billed as Chiang “standing up to the Trump Administration”, the treasurer said “President Trump may dial up his efforts to mislead the American people into believing climate change is a hoax created by the Chinese, but we Californians laugh at such lunacy because we know — without doubt or even reservation — that the fate of the planet is at stake. Building critical public infrastructure and a future that does not depend on fossil fuels is now deadly serious business.”
As he spoke, those present could smell smoke whenever they went outside, from fires that have been raging across northern California, amid hot weather. It is the second year running of very serious wildfires in the state.
Jerry Brown, California’s Democratic governor, has become a strong advocate for action on climate change, using his position as leader of the world’s fifth largest economy to encourage Americans to keep up the struggle, in the face of Trump pulling the US out of the Paris Agreement last summer.
Brown is holding a climate summit in September and the state has committed to moving to 100% renewable energy by 2045 and to a 40% cut in greenhouse gas emissions by 2030.
Getting the green bond bug
The state’s political leaders have a particular enthusiasm for green bonds. California itself has issued $2.2bn of them on Chiang’s watch, for public transport, clean water and pollution control projects, as well as green hospital buildings and a rice-straw fibreboard plant.
In 2016, Chiang went on a ‘listening tour’ of five US cities to meet market experts and understand the barriers to growing the green finance market. His office has also published two studies on the green bond market, the second of which came out on Tuesday.
Chiang said: “Today’s report provides strategies and solutions aimed at turbocharging a new and growing financial market that can help provide more affordable capital to not only meet California’s growing infrastructure needs, but also steel ourselves against wild fires, rising sea levels and extreme weather.”
He referred to estimates by the American Society of Civil Engineers that it would cost $4tr to update the nation’s infrastructure to be greener and more resilient to climate change, and that in California, merely protecting the drinking water supply over the next 20 years would cost $44.5bn. Green bonds were a financing tool that could help with this investment need, he argued.
The 30 page report is based on a symposium held in February with the Milken Institute, and was written by Maressa Brennan and Caitlin MacLean of the Institute’s innovative finance team.
It gives an overview of the green bond market and discusses the product’s applicability to US municipalities, which have their own very large and well established bond market.
Ninety percent of non-defence public infrastructure in the US belongs to states, counties and cities, not the national government, and investment is mainly financed by local authorities issuing muni bonds, some of which are tax-exempt for US retail investors.
There has been considerable growth in US local governments issuing green bonds in the past three years, but the amounts are still small compared with the size of the muni market.
The report is short on arguments for why green bonds would offer munis better financing than they could already get with ordinary bonds. Instead, it emphasises the barriers to issuance — a lack of standardisation and metrics for greenness, as well as the tendency of green bonds to be small and illiquid, dimming investors’ enthusiasm; the lack of a pricing advantage for the issuer; additional costs such as second opinions and reporting.
Asked why, given these disadvantages, municipalities should strive to issue green bonds, Caitlin MacLean, one of the authors, said: “Right now in terms of pricing for these issuances we are not seeing a huge difference between a traditional muni bond and a green bond. But where there is an added benefit is that it forces municipalities to measure and articulate what they are doing in terms of addressing climate change or clean water or building green buildings, forcing them to take more accountability.”
On the demand side, she said, “we are seeing quite a bit of market movement around more sustainable investment. It’s generating a lot of interest from folks who maybe would not care about an ordinary muni bond, but are saying ‘we want investments that have impact’.”
These investors who would not bother buying ordinary muni bonds, but would buy green ones, MacLean said, were a variety, but particularly included family offices, “who want to have more of an impact and from a fiduciary perspective have more flexibility than a Calpers or a Calstrs.”
The Treasurer's Office told GlobalCapital there was a pricing advantage to issuing green bonds, albeit small, and that a bigger pricing advantage would "inevitably follow".
Whatever benefits munis might get from issuing green bonds were at least partly counterweighed by the barriers, the report argued. It therefore proposed five potential solutions that could be used to stimulate municipal green bonds:
-A state Responsible Issuer programme
A programme of support for issuers including standardising definitions, metrics and shades of greenness; providing technical assistance; using academic experts from California’s universities to advise issuers; and offering credit enhancement to lower funding costs.
-California Green Bond Credit Enhancement
The state could guarantee green muni bonds, an idea modelled on the 50 year old Cal-Mortgage programme for loans to build hospitals. But this would burden the state with contingent liabilities.
-A regional Municipal Issuer Fund
Getting smaller municipalities to band together to issue green bonds to make them larger and more attractive to investors.
-Creating a Green Bond Bank
Several variants of this were considered, from a new programme of the existing California Infrastructure and Economic Development Bank (IBank) to new entities that could buy and sell bonds for the munis.
- A green taxable bond market
Tax-exempt muni bonds are unattractive to many institutional investors because they already enjoy tax privileges, and the bonds have low yields. Taxable bonds are more appealing to them — and such bonds could be further sweetened with a tax credit for the investor or an interest subsidy to the issuer.
No free lunch
For each of these ideas, the report outlined next steps, including surveying municipalities to discover the strength of demand.
The Treasurer’s Office said the governor and treasurer would next establish a working group to develop and implement a green bonds strategy.
MacLean acknowledged that being able to issue green bonds, even if these could be issued more cheaply than normal debt, would not in itself enable Californian municipalities to support more debt. Their revenues, including taxes and other levies, would have to rise to service the debt, or their credit quality would decline.
“At the end of the day someone does have to pay for it — it’s not a free lunch,” said MacLean. Ways would have to be found to do that, she said, which might include raising taxes using a special assessment district for infrastructure, as Los Angeles has done.
Using state money to subsidise municipal green bonds, whether through insurance, a bank or tax credits, would make green financing more attractive to districts, but the state would have to find the money.
The Treasurer’s Office said how much the state might be willing to spend was yet to be determined.