Investor appetite for green bonds has been increasing. Green bond issuance is gaining momentum worldwide. A Moody's February report projects 2016 global green bond issuance to exceed $50 billion. This number far exceeds the $42.4 billion seen in 2015. As we’ve noted before, a significant part of this growth comes from China.
According to Bloomberg, U.S. state and local governments have issued about $7.5 billion in green bonds since 2010. This figure represents a small slice of the $3.7 trillion U.S. municipal bond market. The sustainability bond market is fast evolving. Corporate issuers have started to join the fray in what has traditionally been a public sector pursuit.
Market participants have voiced the need for standardization in the burgeoning green securities market. Without specific classifications validating green bonds, the initiative may lose legitimacy over time. "Green" classifications based on subjective issuer metrics risk becoming marketing tools for fundraisers.
The Investors Service published a proprietary Green Bonds Assessment (GBA). The firm is the first of the Big Three credit rating agencies to offer green bond certification. Moody's has incorporated community input throughout its development process. The final GBA method announced in March is in alignment with the International Capital Market Association's Green Bond Principles.
In a nutshell, Moody's GBA is a forward-looking assessment meant to gauge an issuer's approach to green bond financing. The GBA uses a scorecard approach with 5 focus areas. Each are shown below with corresponding weights:
- Organization (10%)
- Use of Proceeds (40%)
- Disclosure on the Use of Proceeds (15%)
- Management of Proceeds (15%)
- Ongoing Reporting and Disclosure (20%)
The final score incorporates the scorecard as well as qualitative considerations accessible to Moody's. Final scores range from GB1 (excellent) to GB5 (poor). Per Moody's, once a GBA is awarded, they're "unmonitored but are expected to refresh annually based on receipt of an annual 'use of proceeds' report from the issuer."
At this time no requirements are in place for green bond issuance in the United States. Green certification is voluntary. Widespread adoption of the GBA, or other tools like it (see Dutch company Sustainalytics), may benefit the green bond market. Access to valuable green bond data can fuel interest and investment in sustainability initiatives.