Marketed under the nickname ‘ESG’ (short for Environmental, Social and Governance), socially responsible investing is a huge and growing business. According to PwC, in 2015, his global ESG-related assets were $2.2 trillion, but by 2020 he had grown to $9.4 trillion, and by 2021 he had nearly doubled to $18.4 trillion. bottom. Sustainable bonds are a big part of that pie. According to the London Stock Exchange’s Refinitiv Group, the world has averaged more than 400 bond issuances every quarter over the past two years, with a total value of over $1.7 trillion. Europe’s issuance is more than double that of the US, but a wave of new green bonds is here.
A particularly active corner of the market: including ESG-certified municipal bonds designed to help municipalities pay for green power decades in advance. According to Kestrel founder Monica Reid, the company has a “one basis point” of the face value of new bond deals to ensure that new issuances are “social,” “green,” or “sustainable.”
We charged $85.00. Her billion in U.S. municipal bonds issued in the last two years
A team of 27 analysts and engineers based in Hood River, Oregon, has certified nearly a third of them.
“Not everything is green, sustainable, or socially beneficial because it’s sponsored by municipal bonds,” Reed asserts. In addition, ports, airports, and the dumping of coal ash are all financed by the municipal market. Turnpikes and toll roads are funded here. We are very demanding. Internally, we have a standard of doing no harm. It’s a problem to recoup with oil royalties and gambling income.”
Like many environmental trends, this one started in California. In the past 14 months, giant Wall Street banks like Goldman Sachs and Morgan Stanley have persuaded Northern California’s ultra-green energy agency to provide about $2.7 billion, with another $2 billion in the works am.
The utility raises that cash up front by selling tax-exempt Kestrel-certified municipal bonds. In return, the bank has so far committed to supplying 2.2 million megawatt hours of “green” power to the California grid from solar, wind and hydropower.
There are many winners. Banks get cheap credit that they can spend as they please
Californians, like residents in the other 15 states and the District of Columbia, can choose their provider and spend their money on greener electricity. And investors can hold bonds knowing that they are not only investing in something greener, but are also backed by a guarantee from a major bank.
Loser? Uncle Sam. If Morgan Stanley raised capital by issuing similarly structured bonds, it could pay interest of approximately 6% subject to federal tax. But if Morgan borrows money at a 4% interest rate through a municipal prepaid green power contract, there is no federal tax. So far, he says $3 billion in green power will cost him about $50 million in tax revenue annually. Maybe it’s worth it.
After all, it’s a model that can quickly spread across the country and help support the development of large amounts of green energy. But it could also run into billions of dollars in hidden annual subsidies to wealthy Wall Street banks. It may not work out in Peoria.
California is one of the 10 states that has allowed the establishment of local power purchase cooperatives called Community Choice Aggregators. They have names like Marine Clean Energy and Silicon Valley Clean Energy and were founded to allow a Californian to buy electricity that he sells as 100% “green.” In recent years, these cooperatives have entered into direct, decades-old contracts with solar and wind farm owners to purchase electricity.
However, these electric cooperatives are completely incapable of managing the large number of complex contracts with their financial counterparties. For example, last year the Marin Cooperative joined forces with sister companies in Silicon Valley, Berkeley, Carmel and others to form a conduit issuer, the California Community Choice Financing Authority (CCCFA).
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Global bond buyers purchased $481 billion in green bonds last year. But buyers are on guard: “Being green doesn’t make it an inherently better investment,” warns Yves Land, who manages multi-billion Muni in Thornburg, Santa Fe, New Mexico.
Over the past 14 months, the CCCFA has issued three $2.7 billion clean energy project revenue bond transactions at 4% tax-exempt coupon rates, courtesy of Morgan Stanley and Goldman Sachs. This money will be used for 30 years of renewable power prepayment. If you pay in advance, you may receive a discount. For example, CCCFA members expect to save $7 million annually on power purchases.
Of course, large advance payments for future commodity purchases are a Wall Street banker’s dream. A closer look at California bond documents reveals an impressive feat of financial engineering involving a labyrinth of companies, commodities, his swaps, and derivatives.
These effectively convert billions of Green-His bond proceeds into sources of tax-exempt funding and trading profits for Morgan Stanley and Goldman Sachs.
“Banks can spend their money however they want,” said Joann Hempel, vice president and senior his credit officer at Moody’s.