One of the most promising financial innovations of recent years is the rise of green finance-that is, harnessing the power of capital markets to support private investment that is good for the environment.
In an era when government budgets are stretched thin, green finance tools can play a vital role in helping to address challenges like environmental degradation, resource scarcity and climate change.
In May, a Project Invested article looked at how Apple Inc. has led the way, most recently with its 2016 issue of $1.5 billion in green bonds, led by Goldman Sachs and several other banks-the largest green bond issue by a U.S. corporation to date.
But Apple isn’t alone. The Climate Policy Initiative (CPI) reports that in 2014, the global total of green investment, both public and private sector, increased 18% from $331 billion to $391 billion. Private investment, now $243 billion worldwide, represents two-thirds of the green finance market.
What does that investment look like in real world terms? Here are four examples of private sector financial leaders who are helping to chart the course for green finance as a problem-solving tool around the globe.
Hawaii and Goldman Sachs Partner on $150 Million Green Muni Bond
Clean energy installations like solar photovoltaic panels can make a big difference in advancing renewable energy sources and cutting energy costs. But the initial investment can be out of reach for low- and moderate-income populations and nonprofits. A green bond issue in Hawaii aims to make clean energy more affordable and accessible.
The Hawaii State Department of Business, Economic Development and Tourism partnered in 2014 with Goldman Sachs on a $150 million Green Energy Market Securitization, a green bond issue to enable low cost capital that expands access to clean energy for consumers in the Aloha State. Hawaii is the first state to experiment with this novel financing arrangement, but others are watching closely to see how it works.
The $150 million bond is backed by a “green infrastructure fee” on utility bills that is offset by corresponding reductions on the public benefit fee.
By increasing affordability and access to capital, such bonds may be key to meeting the Hawaii Clean Energy Initiative’s laudable goal to achieve 100% renewables by 2045
Goldman also underwrote an innovative $350 million green century bond for D.C. Water to help fund a portion of the D.C. Clean Rivers Project. The 100-year maturity creates intergenerational equity by spreading the cost of the water infrastructure project over its life, and it was the first U.S. green bond to be certified by an independent review.
HSBC Helps Make U.S. Offshore Wind a Reality
For years, wind energy has been touted as a promising source of clean, renewable power, with offshore wind farms seen as having potential to achieve that goal. But like many new technologies, making those farms viable requires substantial investment.
In the U.S., offshore wind has been slow to develop (especially compared to Europe, which has invested an estimated $60 billion in the industry). But the Deepwater Wind project led by the investment firm D.E. Shaw is intended to change that.
Located off the shore of Rhode Island, the $290 million Block Island Wind Farm will be the first U.S. offshore wind farm. The 30-megawatt wind farm is an adaptation of the deck platforms you’re familiar with from the oil and gas industry-but instead of drilling into the ocean floor, each platform hosts a large turbine that harnesses the powerful winds of the sea to generate electricity. A sophisticated system of submarine cables will be used to connect the platforms to shore and transmit electricity generated by the turbines.
The project is slated to come online by the end of this year, and it’s expected to be the first in a series of offshore wind farms that will flourish into a significant energy source and create hundreds of new jobs.
D.E. Shaw has spearheaded the project, which is finance in part by a $65 million loan from HSBC. The global banking and investment firm has also committed an additional $1 billion in a broader green bonds portfolio for investment in other projects around the world.
Morgan Stanley’s $500 Million Green Bond Bet on Alternative Energy
Investors and policymakers agree that clean alternative energy will play a vital role in powering America’s future. But how to finance the development of alternative energy technologies to be competitive with more established sources of power? Green financing is an important tool to make that happen.
Morgan Stanley issued a June 2015 $500 million green bond in support of renewable energy projects. Among the projects benefiting from the fixed-income funding stream are Route 66 Wind, a 150-megawatt wind farm, and Rattlesnake Wind Energy Center, a 207 megawatt wind power project, both located in Texas.
That follows in the steps of Morgan Stanley’s underwriting of a green municipal bond issuance for Massachusetts, which will finance a number of environmentally friendly projects. Morgan Stanley notes that the success of individual green finance projects boosts investor interest and confidence, which should serve to generate further demand: “There is healthy demand from investors, which in turn has fed the confidence of institutions seeking to achieve their sustainability goals through capital markets solutions, a virtuous cycle with plenty of room to grow.”
Nomura Group underwrites World Bank Sustainable Development Bonds
Nomura Group believes economic growth and environmental sustainability don’t have to be competing goals-they can go hand in hand. In 2015, Nomura partnered with the World Bank for a green bond issue totaling $450 million (JPY 56 billion):
In December 2015, Nomura underwrote and sold World Bank Sustainable Development Bonds to the retail investors in Japan. The World Bank raises funds in the international capital markets to finance sustainable development projects in developing countries focusing on poverty reduction and inclusive growth across a range of sectors including among others: agriculture and food security; education; energy; finance, trade and industry; healthcare and social services; law and governance; transport; and water and sanitation.
Nomura Group has also worked with organizations like the Asian Development Bank, African Development Bank, International Finance Corp on sustainable investments.
Those are just four examples of how private sector financial leaders are advancing green finance as a tool to address some of the most urgent global problems-there are plenty of others. They serve to illustrate how private funding can work in concert with public institutions and the non-profit sector to get real results.