Where�s the Money? Financing the Green Economy

Just over a month ago, nearly every country on the planet met in Paris and committed to a landmark agreement to combat climate pollution and stave off destructive climate change.

Conference head Laurent Fabius, France's foreign minister, lauded the pact as a balanced plan that is a turning point toward reducing global warming.

The agreement builds on ongoing actions to clean our air and water and shift to non-polluting, renewable energy sources. There is much work ahead, but if we carry it through, we stand a real chance of preserving a livable world for our children and grandchildren and generations beyond.

As Treasurer, I intend to use my ability to finance green projects to advance the goals of the historic Paris accord.

I sell bonds to raise money for non-polluting transportation, clean water facilities, and pollution control. I also oversee economic development authorities that provide billions of dollars in capital for environmentally friendly purposes. Examples include recycling, electric car charging installations, and energy efficiency upgrades for residential, multi-family, and commercial buildings.

All these programs need to be expanded.

Green Bonds

Foremost is the possibility of developing new forms of municipal borrowing, dubbed �green bonds.� I, and my staff, together with business groups, environmental advocates, the investment and finance industries, and other states and nations, are exploring green bonds� potential as a new market for financing critically needed environmental work.

Wind farms, clean air vehicles, public transit, and cleaner manufacturing technologies are among such investments.

The market for this money is flourishing, particularly in Europe and elsewhere overseas. In 2012, a total of $3 billion in green bonds were sold. In the first six months of 2014, the sum was about $20 billion, nearly twice as much as in 2013 as a whole.

All those green bonds were investment grade, the Economist magazine recently noted. Many were two or three times oversubscribed; half were issued by companies, a switch from 2013, when most green bonds were sold by international agencies such as the World Bank.

Climate Bonds Initiative, a research group, estimates the cumulative value of all green bonds was around $50 billion by the end of 2014.

In California, we have taken some early steps to test green bond demand. In 2014, we sold $300 million of green, tax-exempt, general obligation bonds. As noted in my Green Bond report last December, all but some $8.45 million of those funds have been disbursed. Among the funded projects:

• Emissions reduction on heavy-duty trucks in LA and the Central Valley.
• LA County Light Rail and transit expansion.
• A San Francisco central subway project.
• A water treatment plant upgrade in Ventura County.
• Ventura County watershed protection.
• High Desert water treatment and reclamation.

My goal is to increase the pace of green bond issuance in California with the cooperation of the governmental agencies that actually spend the money. One way to do that would be to collect a number of standardized green bond offerings into a larger instrument. Such a mechanism should lower costs by cutting government red tape and creating economies of scale.

What�s Green?

But, here�s the rub: There is no simple definition of a green project.

For instance, is a highway project green because a new generation of construction materials produces less pollution? Or is it not as green as a mass transit project using the same route? Is a reservoir green because it preserves water? Or does it damage the watershed? Other examples are easy to imagine.

The answer is a simple but unsatisfying one. Today for the most part, a project is green because one says it is. There is no standard to evaluate it and no single organization that says, �Yes, this is a green project.�

True, in the construction industry there is the U.S. Green Building Council, which created a Leadership in Energy and Environmental Design (LEED) rating system for the design, construction, operation, and maintenance of green buildings, homes, and neighborhoods. For highways, there is the The Greenroads Rating System. For transit, The American Public Transportation Association has a variety of green guidelines.

There is no single body, though, that certifies all projects are green. That means to effectively sell bonds as �green,� your word is probably not enough. There needs to be a way to certify greenness.

That is not a free service. LEED certification, for instance, can add more than a million dollars to the cost of a large building. When you add in the cost of design and oversight, the costs can be large enough to eat into investment returns.

As a public official, I face a quandary. My duty is to obtain the best price for the state, whether we are buying or selling green bonds. However, if the measurement criteria are so fluid and ill-defined, fulfilling that duty can entail superimposing a lot of subjectivity onto a body of objective data that is not well defined.

To be salable as a special category of bond, a green bond must have something special to offer.

Listening Tour

I believe the market needs to strike a balance between accepting anything touted as green, which could dilute the attraction of green bonds, and a standard so strict that hardly anyone could meet the criteria.

I want to know what other government issuers and investors are doing. What are their best practices? Do they see the green investment market as sustainable?

To learn more, I will be going on a listening tour in February and March with events in San Francisco, Chicago, New York City, and Boston. I will be meeting with both environmentally motivated investors and those who have yet to adopt green preferences, to seek out their ideas and best practices, and see how they can be applied to California�s green investment and borrowing needs.

I�m keen to gain new insights on how California can further collaborate with the private sector, other states, and the federal government. I believe there is a lot we can do to make green investments in our communities and make good things happen for our people and our planet.