Clean Energy Bonds: Let’s Take Away the Market for Fossil Fuel Investment

Investors in the United States increasingly want to invest in solutions to climate change. The good news is that investors have growing opportunities to make those investments, with clean energy bonds.

In the first comprehensive study of U.S. institutional investors’ appetite for green bonds, Clean Energy Group and Croatan Institute, two national nonprofits, have released a report, What Investors Want: How to Scale-Up Demand for US Clean Energy and Green Bonds. This market has lacked a strong understanding of investor demand for clean energy and green bonds in the U.S. Without a clear sense of this demand, this market will not expand at the scale needed to finance badly needed climate and energy solutions. This study provides a blueprint for growing the market for fixed-income securities to finance clean energy projects and solve climate problems.

The report found that the U.S. market for fixed-income securities known as “green bonds” has become a robust and growing market. States, cities, government agencies, and corporations have issued billions of dollars of green bonds to finance investments in clean energy such as solar and wind projects and in energy efficiency. In order to capture this financial experimentation and innovation and to take it to the next level, Clean Energy Group (CEG) and Croatan Institute undertook a year-long investigation of the demand characteristics of U.S. institutional investors.

Over the course of the last twelve months, CEG and Croatan interviewed more than three dozen bond buyers, including asset managers and investment consultants, foundation endowments, faith-based investors, investment banks, corporations and insurers, and public pensions.

The study examined what institutional investors need – and identified the demand characteristics that must be met – in order to make the decision to purchase these financial instruments as part of a sound investment portfolio. These green investments will also help to advance mission-related climate and clean energy goals. Among other things, the report found that liquidity, credit quality, and bond size are all key concerns for investors. The report also found that there is a critical need for investor education about green bonds, as well as standardization of deal structures and documentation. Importantly, for universities, foundations, pension funds, and other institutional investors, green bonds present an opportunity to align their investments with their missions, without compromising their fiduciary responsibilities.

In September 2014, at a side event to the United Nations Climate Summit in New York City, CEG convened an in-person session with two dozen investors, issuers, rating agencies, and funders to discuss preliminary findings of the inquiry. This paper is the product of that investigation and in-depth discussion.

The study first places clean energy bonds within the larger frame of the green bond market. It briefly highlights market characteristics of green muni bonds and corporate green bonds.

It provides a disaggregated interpretation of investor demand for these kinds of instruments across a variety of institutional investors, from asset managers and bond portfolio managers to foundations and endowments, faith-based investors, insurers and pensions.

However, this demand is not homogenous across all categories of investors, and each institution will apply its own specific investment guidelines and policies to its underwriting criteria. Liquidity, credit quality and size all matter a great deal to investors. Understanding the demand characteristics of institutional investors will enhance new opportunities to increase fixed-income investments in clean energy.

A centerpiece of the report is a set of recommendations that provide an action plan for helping grow demand for these kinds of securities. The recommendations focus on three key areas of activity: further research and analysis, convening and greater exchange of information among investors and other market participants, and ways to develop, diversify and deepen deal flow.

At present, this field remains largely unexplored. While many acknowledge the role that institutional investors need to play in financing clean energy and climate solutions, it is not known what types of investments make sense for their portfolios. Until they know what investors want, the suppliers of green bonds will not have a clear signal for what kinds of bonds they should issue to meet that demand.

Having a better understanding of the role of clean energy bond finance is especially important for the growing groups of foundations, endowments, and other institutional investors that are grappling with fossil-fuel divestment and seeking new investments in climate solutions. They need a positive investment strategy to complement any divestment activity. Green bonds should be a key element of that strategy.

In other words, investors who want to take the money away from fossil-fuel industries through divestment should also consider ways to take away the market by investing in clean energy bonds.

Unless we know more about this clean energy finance market and how to grow it, we cannot expect to solve the large climate problems that face the country.

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For more information, see Clean Energy Group’s January 2015 webinar “What Investors Want: How to Scale Up Demand for US Clean Energy and Green Bonds” featuring guest speakers from Clean Energy Group and Croatan Institute.