Renowned for its sumptuous plantings and exuberant orchids, Longwood Gardens is going green in a new way: “green bonds.”
Its $250 million renovation is being funded through a combination of grants, endowment money, and a tax-exempt “green” bond issue for $200 million in 2021.
It’s traditional for companies, towns, and nonprofits to finance projects with bonds, which are essentially loans from investors that promise to repay principal with interest. But Longwood is using a fast-growing tool — green bonds — which are marketed to investors who aim to back environmentally friendly projects.
This market has grown to just over $500 billion last year in green bonds issued globally, from $100 billion in 2017, according to the Climate Bonds Initiative, a group that standardizes what qualifies as a green bond. Standard & Poor’s forecasts that green bond issuance globally will surpass $1.5 trillion in 2022.
Who buys “green” bonds?
These days, mom-and-pop investors are increasingly asking their portfolio managers to put money to work in companies that also benefit the planet. But institutional investors with a mandate to invest money with strong ties to ESG, or environmental, social, and governance-related projects, are the main customer.
And with the infrastructure bill in Congress, more municipalities may be looking to fund projects using “green,” “climate”, “social” or “sustainability” bond labels.
The definition can be slippery. Some experts say “climate” bonds refer to the whole universe of bonds, loans or other debt that comply with the Climate Bonds Initiative, while “green” refers to specific bonds, loans or other debt issued to finance projects that advance environmental goals and policies.
The International Capital Market Association, a Wall Street trade group, offers voluntary standards defining “green,” “social” and “sustainable” bonds.
Others self-label, such as California-based bond investment manager PIMCO, one of the world’s largest for fixed income.
PIMCO defines the market this way: green bonds include “renewable energy, efficiency, clean transportation, green buildings, wastewater management, and climate change adaption.”
To qualify as a social bond, money must go toward achieving positive social outcomes, or target populations living below the “poverty line, marginalized communities, migrants, unemployed, women ... or sexual and gender minorities, people with disabilities, and displaced persons.”
Sustainability bonds aim for both an environmental and a social impact.
In the garden’s case, chief financial officer Dennis Fisher said the money is funding the “Longwood Reimagined” expansion, which aims to upgrade the former Pierre S. DuPont chemical mogul’s family estate, now a botanical and conservatory complex open to the public.
The issuer is the Chester County Industrial Development Authority, and the $200 million qualified as “sustainability” bonds.
To Longwood officials, the bond offering is a different way of planting seeds and furthering its mission. And the group has worked to ensure that its bonds qualify as green.
“This industry is maturing as it goes,” said Eileen Perpiglia, Longwood’s associate vice president of accounting and finance. Longwood retained Kestrel Verifiers as a second-party opinion, a certification firm that determines whether an offering is truly “green” — or just “greenwashed.”
Among 17 possible sustainable goals, Longwood successfully ticked off qualifying categories that included advancing aims in high-quality education, clean water and sanitation; sustainable cities and communities, and responsible consumption.
Kestrel’s CEO, Monica Reid, confirmed that there is huge demand among ESG investors since 2013, when Massachusetts became one of the first states to dub a municipal issuance a green bond.
“Although it’s still a small part of the market, investors are demanding a more climate-aligned focus,” she said.
Is there a financial benefit to securing a stamp of approval from a certifier?
“Sometimes there is a pricing benefit” with a lower interest rate or more demand for the bonds, Reid said. An external reviewer “brings in new ESG investors. They might not typically look at Chester County Industrial Authority, Longwood’s issuer. But green bonds with a Kestrel stamp on it? New investors look at that,” she maintained.
Bond ratings agency Moody’s gave Longwood’s 2021 bond issue a healthy Aa2 rating, citing a “good brand and strategic position as a leading public garden located on 1,100 acres in the greater Philadelphia region, typically with over 1.5 million visitors annually.”
It helped that Longwood’s outdoor activities remained open during the pandemic.
Noteworthy is that muni bond issuers in green finance can use the proceeds only for their intended purpose, Reid said. Longwood also committed to document how it uses the money with annual reports through online bond price database EMMA, operated by the Municipal Securities Rulemaking Board.
Does the “green” label mean better returns?
“There’s really not enough data or supply to say yet,” said Melissa Winkler, senior vice president in sales and strategy at Kestrel. “The sample size is still too small. The muni market is already considered a high-quality market. Compared to a single-A corporate, a single-A muni is stronger” because of government backing, Winkler said.
Interest rates for Longwood’s recent bonds totaled 3.24% for a 2019 bond issuance and 2.68% for the 2021 issuance.
Wharton finance professor Luke Taylor co-authored a 2021 paper, “Dissecting Green Returns,” and found that “green” investments across stocks and bonds outperformed.
But Taylor and colleagues Lubos Pastor of the University of Chicago and Robert Stambaugh of Wharton wrote that without huge fund inflows and the hysteria of climate headlines, investors in “green factor” stocks would have lost money in the eight years through 2020.
“Should green stocks’ recent outperformance lead one to expect high green returns going forward?” they wrote. “No, we argue. That outperformance likely reflects an unanticipated increase in environmental concerns.” In theory, returns could drop off in the future.
Meanwhile, other states, such as Delaware, are examining green bonds further after one in 2020, said state treasurer Colleen Davis. She recently hosted a roundtable with issuer Delaware Sustainable Energy Utility.
Thomas Beckett, senior vice president of NW Financial, a governmental finance and municipal underwriting firm, told the panel that green bonds are likely to proliferate “as more issuers incorporate energy efficiency, sustainability, and resiliency to climate change in their capital spending.”