Green Bonds have led a tremendous growth in environmental finance over the past five years, but that growth has been heavily-weighted towards investment grade credits with their accompanying risk/return. The predominance of investment-grade credits partially results from the all-or-nothing approach of Green Bonds – the bond is either 100% green or 0% green. The 100% green requirement shuts out many issuers seeking to finance environmentally-sustainable projects because a company needs to be sufficiently large and well-capitalized to be able to issue bonds of a sufficiently large principal amount solely for environmental purposes. Most types of bonds require a minimum principal amount to ensure secondary market liquidity, roughly speaking the equivalent of $200 million. This especially shuts out smaller and more highly leveraged companies.
To diversify Green Bonds, it may be possible for investors to rely on a promise from issuers to use a specified portion of the proceeds of a bond for environmental purposes. Currently, an issuer seeking to finance $100 million in environmental capital expenditure would be unable to obtain a “green” credential. But if that issuer were to raise $100 million for conventional purposes and $100 million for environmental purposes in the same issuance, the issuer should be able to label its bond as 50% green. Rather than all green or all non-green, the bond is “Green Striped.”
To read more about “Green Striping”, click here.
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Latham & Watkins LLP
by Aaron Franklin
USA August 1 2016
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