There appears to be a good reason why states and cities don’t go out of the way to market their bonds to environmentally conscious investors: it doesn’t save them any money.
That’s the conclusion from a study by Stanford University accounting professor David Larcker and Edward Watts, a doctoral student at the business school there. Instead, they found that governments wind up paying higher fees to bankers when they sell certified green bonds than they do when they forego that brand, based on a review of debt issued for clean water, commuter trains, solar energy and other such projects.
The findings underscore the municipal-bond market’s image as a haven for slow-moving investors largely concerned about getting tax-free income. It also explains why such green-certified bonds account for only a small fraction of the $3.8 trillion that’s been raised by state and local governments, even though much of the money is used for work — like new public transit systems — that has a positive environmental impact.
“Municipal investors appear entirely unwilling to give up monetary gains to support Green projects,” wrote Larcker and Watts, who said underwriting fees are 10 percent higher for green bond issues. “Our results suggest that municipalities actually increase their borrowing costs by issuing Green bonds.”
States, cities and transit agencies have sold $3 billion of green bonds this year, accounting for about 3 percent of new debt sales, according to data compiled by Bloomberg. At its peak in 2017, such issuance hit $10 billion.
Some government officials have noticed that the marketing efforts — which arguably could increase demand — did little to drive down their borrowing costs. After the Iowa Finance Authority borrowed for a clean water project this year, the agency found no pricing difference.
“It helps to broaden the investor base and eventually, maybe, they’ll be more momentum toward driving our costs lower,” said Cindy Harris, the chief financial officer at the Iowa Finance Authority. The agency pays the same underwriting fees on green bonds as non-green securities, she said.