How Green Are Green Bonds?
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Finance & Accounting Jun 9, 2021

How Green Are Green Bonds?

Large companies issuing green bonds may have more to do with interest rates than altruism.

man holding green bond certificates

Lisa Röper

A few weeks ago, Amazon issued its first sustainability bond, raising $1 billion to invest in renewable energy, clean transport, green buildings, and affordable housing. The $1 billion bond is part of a growing trend of “green bonds” issued to fund environmentally friendly projects. Global issuance of green bonds reached a record high of $270 billion in 2020 and could reach $400–$500 billion in 2021, according to a report by the Climate Bond Initiative (CBI).

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But just how “green” is Amazon’s green bond? I’m skeptical.

Green bonds are very popular these days and are considered by banks, corporations, governments, and supernational organizations such as the World Bank to be an important source of funding to finance climate-related and environmental projects. According to the CBI, the largest green bond issued in 2020 was a $13.0 billion Multifamily Green Mortgage-Backed Security by Fannie Mae used to finance mortgages backed by newly constructed multifamily properties that are certified as green buildings. Other large issuers of green bonds are urban transport operators such as the New York MTA, Los Angeles MTA, or Société du Grand Paris, the latter of which uses its green-bond program to fund an expansion of the Paris commuter and metro rail network.

But Amazon’s green bond is different. First, Amazon does not need newly issued money to finance its investment in the environment. In fact, Amazon is flush with money. In its most recent 10K, dated February 3, 2021, Amazon reports a total of $84.4 billion in cash and cash equivalents and marketable securities. This huge pile of cash accounts for more than 26 percent of Amazon’s total assets and 21.9 percent of its sales. Both ratios indicate that Amazon carries a lot of excess cash beyond what it needs for its routine operations.

When investors evaluate an investment in a traditional, not-green bond, they consider whether they will receive an adequate return on their investment to compensate for the credit risk of the issuing company. However, green bonds are different. Here, investors should also evaluate the environmental impact of their investment—and critically, whether the proposed green investment would have been undertaken even if they were not to provide funding. That is an important principle that we teach in business schools: that only incremental costs or revenue should be part of an evaluation of a project. And in the case of Amazon, the green investment is not incremental.

Amazon is not the only company issuing green bonds when it can fund its sustainable projects with existing funds.

— Efraim Benmelech

In its bond prospectus, Amazon commits that the net proceeds from the sale of the green bond will be allocated to finance or refinance green or social projects such as the acquisition of electric vehicles, installation of charging stations, or private-equity investments in clean transportation. Other eligible projects include sustainable buildings, affordable housing, and socioeconomic advancement and empowerment. There is no doubt that these are all nobles causes. However, for the most part it seems that Amazon has already invested in the aforementioned projects. Amazon invested in the electric-vehicle startup Rivian in early 2019 when it led a $700 million round of funding. It later purchased 100,000 electric delivery vehicles from the startup—and has already begun road-testing them in San Francisco. Similarly, this January, four months before its green-bond issuance, Amazon launched a $2 billion housing-equity fund to preserve and create over 20,000 affordable homes.

It seems that Amazon’s green and social projects are already up and running. And Amazon has loads of cash. So why does Amazon issue a green bond? The answer is simple: because interest rates are still historically low, making it an opportune time to inexpensively raise money. Amazon and other investment-grade issuers have been issuing large amounts of bonds since February 2020. In fact, Amazon’s green bond accounts for just a small portion of the $18.5 billion worth of debt issued by Amazon in May. The proceeds of this behemoth bond issue will be added to Amazon’s existing pile of cash—at least for the moment.

But Amazon is not the only company issuing green bonds when it can fund its sustainable projects with existing funds. Last summer, Alphabet—Google’s owner—issued $5.75 billion in sustainability notes despite the fact that they are sitting on cash and marketable securities worth $121 billion, or 43.5 percent of their total assets. And Apple issued a $4.7 billion green bond in March 2021 while holding $191 billion in cash and marketable securities—the largest such cushion in the world, amounting to 59 percent of Apple’s total assets.

Investors seem to be falling for the allure of these bonds regardless of whether their money is needed. Don’t get me wrong: Alphabet, Amazon, and Apple have all been incredibly successful. They provide products and services that have revolutionized our lives, and those who invested in these companies early and held on to their investment saw hefty returns. But these companies should use their own dime—or mountains of dimes—to invest in environmental and social causes. And investors who care about those causes should invest in the companies that need the money the most.

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This article originally appeared in Forbes.

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Henry Bullock Professor of Finance & Real Estate; Director of the Guthrie Center for Real Estate Research

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