Green Bonds or green washing?

Green Bonds or Green washing?


The latest rage in environmental finance is the green bond.   Christiana Figueres the Executive Secretary of the UN Framework Convention on Climate Change even declared optimistically and perhaps hopefully at the 2014 Investor Summit on Climate Risk in January that 2014 would be the year of the GreenBond ( ). Based on the issuances and financing of green bonds in 2014 and 2014, most people would agree that Green bonds have taken off and this is the first year where green bond financing has increased significantly from almost nothing to a small player in the finance sector.

The question remains, what makes a bond green?  The definition of a green bond is evolving but one recognized definition is encoded in the green bond principles.  A subset of green bonds are what are called Climate Bonds.  These are primarily promoted by the Climate Bonds Initiative.  Now a number of organizations are starting to define what is a and is not a green bond upfront.  Examples of green bonds that are generally accepted are bonds where the financing is going to renewable energy projects, energy efficiency, waste to energy, mass transit including subways or light rail transit as well as others.  Here is a list of potential projects that have started to be defined by as acceptable for financing by green bonds (link to green bond or climate bond definition).

However, since this is early days of the green bond market, it is still a little like the wild west out there. What does that mean? It means that there are no rules as of yet and some organizations and people are taking the opportunity to define on their own what a green bond is or is not.  For example if an oil refinery is looking for financing could you consider this a green bond?  What about a waste water treatment project?  what about if the funding is used for general “green” projects which are yet to be defined?

Bonds are of course one method for getting financing for your project.  What this means is that most of the organizations and people involved in bond financing are only interested in the interest rate, the yield, the tenor and the risks associated with the underlying investment and how well it matches with the rate being charged and how well it fits the needs or gaps of the buyers portfolio.  In addition, they are also interested in the liquidity of the investment, is there another market ( a secondary market) where once the bond has been issued by the sponsoring financial organization the bond can be sold to another buyer.  The questions is is how many of these green bond financiers both from the buy side and the sell side are interested in the green – supposed – benefits of the projects being funded by the green bond.

The question is what is a green bond and what makes it green?  Is a green bond which is used to pay for a new subway a green bond?  No-one would argue that a subway will move people from cars meaning less fuel burned and less greenhouse gas emissions particularly if the electricity powering the subway is clean (and does not include any coal).  That is the situation in Ontario where the the Ontario government issued a green bond to pay for the construction of a subway line in Toronto. Do they need a green  bond for this?  They government would have probably financed this with a bond regardless.  Does this mean that the subway will be “greener” than otherwise because it is now financed with a green bond? What are the differences between a normal bond and green bond?  Is there a lower interest rate for the borrower  or any sort of preferred terms?  I suspect not and if not then the financing is the same and what is the label “green” for. In this case, the answer could be marketing and branding?

If we look at green bonds through the lens of greenwashing…what do we find?  Sustainable brands has a good set of guidelines for if your ecofriendly products are green washing.  As sustainable brands says at least 95% of products are guilty of breaking at least one of the sins of greenwashing.  Let’s see look at green bonds …

First the sevens sins as shown below are taken straight from here.

  1. Hidden Trade-Off: Labeling a product as environmentally friendly based on a small set of attributes (e.g., made of recycled content) when other attributes not addressed (e.g., energy use of manufacturing, gas emissions, etc.) might make a bigger impact on the eco-friendliness of a product as a whole.

Green bonds – I would argue that some green bonds are being labelled based on one or a small set of attributes as opposed to looking at the entire product or the entire project that is being funded.  However, at the same time there are some projects funded by green bonds which are looking at many attributes.

VERDICT – Partially guilty

Stay tuned next week for the other sins of greenwashing and how green bonds rate!

My early experiences with selling energy efficient lighting – did we guarantee energy savings?

There is a blossoming of innovation in energy efficiency financing that has taken place over the last 10 years as many of the ideas around energy efficiency and how to pay for them have been learned and seeped into the marketplace.

Of course all of these projects are positive NPV.  Using the cash flow from energy savings to pay off the upfront capital costs and borrowing costs of the energy efficiency investment, allows these investments to be paid off with no upfront capital costs to the project owner. In an environment with rising energy or electricity utility prices and an environment where the total cost of generation is higher than the costs associated with conservation, incentives are supporting increased investments in energy efficiency.

I worked for a company in the early 1990’s , at that point called Orion Scientific – which may have morphed into Orion Energy Systems.  We approached businesses that were operating for close to 24 hours a day and tried to sell them energy efficient lighting systems which at that time consisted of more efficient electronic ballasts, more efficient fluorescent tubes (T4’s instead of T8’s) and replacing potlights with CFL as well as selling a reflector to reflect the light down from the top of the T4.  The capital costs were financed through a third party lease to own arrangement where the lease costs were less than the energy savings, so the business still saw some of the savings while paying off the costs of the efficiency investment.  The payback was somewhere in the 3-5 year period.  There were a whole set of barriers for why businesses said “No”.  From my perspective, these were mostly about

  • Inertia or laziness
  • Resistance to change
  • Split incentives (the person operating the business not paying the utility costs)
  • Doubt about the savings actually being achieved (and in turn wary about being sold something that did not exist)

When I was selling these energy efficient lighting systems while we would project the actual energy savings based on the historical use patterns, we did not “guarantee” the energy savings.  If the use changed, for example the business only ran 12 hours a day rather than 18, then the lease costs would not change even though the energy savings were less.

Granted the total energy costs were also less, since the business was only operating two-thirds of the time.  Now however, with the use of energy modelling and legal agreements and ways to account for changes in use of the building as well as accounting for particular cool or hot weather patterns, companies will actually guarantee energy savings though energy performance agreements.  If the building does not perform as anticipated, the contractor will pay the client what they should have received for energy savings.

With energy performance agreements, the contractor aslo takes on the responsibility of ensuring that the building or facility is operating optimally.  They do this by commissioning the building and monitoring the energy use of the building.  Of course it also means that when bidding on an energy efficient contract, the incentive is to bid somewhat lower, design for a better standard and when operating you should be able to hit in the middle most of the time.  This will be contrary to an energy efficient retrofit with no energy performance savings agreement where the contractor will promise high and the building may be able to perform as intended or not.  There is no financial penalty of the building does not perform as intended.

The energy efficiency sector has moved significantly since then and particularly over the last few years.  I will explore those in future posts.

Is Energy Efficiency like a Treadmill?


Will energy efficiency be like a treadmill that never stops?  Is that a good thing or a bad thing?  The idea of “negawatts” and investing in energy efficiency has been around for a long time.

When I was in grad school Amory Lovins of the Rocky MFeatured imageountain Institute came and did a talk on negawatts and pushed the case for investing in energy efficiency instead of large new generators.  He said it was cheaper to reduce energy than investing in large generation.  In Manitoba, where I was at the time, a land of large hydro electricity and lots of potential and clean sources of power, it was not clear how the message was received.  Manitoba Hydro went on to launch one of the first energy conservation programs in the country (Powersmart) while at the same time examining which next big dam to build.  This was even though the big dams that were built in the 1960’s and the 19070’s –  the time of the mega project in Canada had significant unintended consequences.  Not unexpected as they significantly altered the flow of the Churchill River so that it flowed down a different river (The Churchill River Diversion) and flooded the land of several First Nations.  Of course as nowadays, the business model of Manitoba Hydro and Quebec Hydro is to export as much clean power as possible.  In the 1980’s, it was more about exporting power and now it is about exporting “clean” power.

After the Amory Lovins speech being inspired I went back and did a paper for a course using a scientific American article showing the negawatts (could have been this one – paywall) that could be generated in Manitoba rather than building the next big dam – Conawapa. That was the first supply curve for energy efficiency that I had seen.

The underlying message that Amory Lovins made to us remains the core reason why utilities in all countries pursue energy conservation and efficiency programs.  If anything the argument has been strengthened based on the experience over the last 20 years.  It remains significantly cheaper and less risky to invest in energy efficiency than to build new generation.  OF course when these programs started they were targeted at large industrial users or homes and residences.  Now more and more energy efficiency is starting to target commercial and institutional buildings and all aspects of power use in these buildings.  There were far more barriers as well to financing and accessing capital and that is why the utilities tend to run programs to incent energy efficiency.

I have heard that it takes 30 years for an invention to be proven in the lab to get to the broader marketplace.  Just now in 2015, there is finally starting to be booming or at least the start of a booming market place in energy efficiency.  The private sector is investing capital and there are now a number of companies working to lower the barriers to investing in energy efficiency.  These include companies like Noesis, HASI, Mercatus and the numerous other solutions providers that have arisen.  All of these institutional infrastructure have started to provide the tools and language and trust that the marketplace to needs to realize the returns, mobilise the capital and educate the marketplace on the benefits and returns of investing in energy efficiency.

The energy efficiency market is here to stay and in some ways it is just going to get bigger.  As technology progresses, the existing building stock gets bigger and bigger, opportunities will always remain for reducing energy and saving money and having these upgrades financed through the savings, particularly in a world where electricity prices appear to keep increasing and where there is uncertainty around the price of fossil fuels.  In addition, as societal values continue to change and value the environment more and more, there will be an increased value put on reducing greenhouse gas emissions and this naturally implies less energy use and increased efficiency.

I have more to say about the treadmill analogy in a future post.