In an interview with CEFF, the Connecticut Green Bank (CGB) unveiled its plans to bring to market approximately $15 to $20 million of new $1,000 face value “Green Liberty Bonds.”
The potential broad appeal of the Green Liberty Bonds hinges on their uncommonly low face value – most municipal bonds are sold in minimum denominations of $5,000 rather than $1,000.
The CGB hopes that the Green Liberty Bonds, if broadly subscribed in Connecticut, will establish a precedent that encourages lawmakers to create a national green bond program analogous to the war bond programs of World War I and World War II.
In an interview with CEFF, the Connecticut Green Bank (CGB) unveiled its plans to bring to market approximately $15 to $20 million of new $1,000 face value “Green Liberty Bonds” around April 22 in recognition of the 50th anniversary of Earth Day.
The new bonds are expected to fit in the mold of the CGB’s previous green bond, issued in April 2019; they will be backed by Solar Home Renewable Energy Credits, with proceeds going to support the CGB’s Residential Solar Investment Program. However, in a twist, the new bonds will be available not just to institutional investors but to retail investors throughout Connecticut and beyond. A policy expert familiar with the CGB’s plans views the issuance as a promising first step toward a democratized climate funding solution which could be implemented on a national scale. More information on the issuance can be found on the bank’s website.
The new Green Liberty Bonds, once issued, will represent only a tiny fraction of the burgeoning universe of green bonds. Since the European Investment Bank created the first green bond, in 2007, over $700 billion of green bonds have been sold by diverse issuers, including corporations, governments, and supranational institutions. However, within this universe, the Green Liberty Bonds (and the predecessor 2019 notes) belong to a class of ultra-green securities. Not only are the proceeds of the issuance certified to go to green causes (a feature of all green bonds); the collateral securing the bonds itself is green (in this case, renewable energy credits). Only a minority of green bonds fit this description, according to Jeffrey Schub, executive director of the Coalition for Green Capital.
Distinguishing the Green Liberty Bonds further – and attracting attention from policy experts – is the way the bonds will be marketed. Unlike the 2019 notes, which were sold to a single institutional investor through the asset-backed securities market, the Green Liberty Bonds will be sold to both retail and institutional investors through the municipal market. The CGB hopes that hundreds or even thousands of citizens in Connecticut and beyond will purchase the new bonds.
Breaking Bonds Down
The potential broad appeal of the Green Liberty Bonds hinges on their uncommonly low face value – most municipal bonds are sold in minimum denominations of $5,000 rather than $1,000 – and ties into the CGB’s broader vision for democratically funded climate solutions.
"In order for us to confront climate change and provide all of society a healthier and more prosperous future,” said CGB CEO Bryan Garcia, “we need to go beyond democracy and enable capitalism from and by the people to create the sustainable future and modern infrastructure we want to see in our society.”
$1,000 face value bonds are relatively uncommon in the municipal market, and perhaps unprecedented in the municipal third-party certified climate bond market.
He summarized the CGB’s vision behind the marketing strategy for the new green bonds: “We are making this vehicle available to the masses as opposed to the institutional few, creating opportunities for our fellow citizens to save, to build wealth, and to save the planet."
Survey data collected by the CGB supports the bank’s hypothesis that $1,000 face value green bonds could attract broad interest from local citizens. In a survey of 609 Connecticut households, 82% of respondents indicated it is “important” for members of the public to financially support green energy projects through their investments; out of three illustrative bond denominations ($5,000, $1,000, and $500), data from the CGB shows that the $1,000 denomination – the lowest amount permitted under the securities clearinghouse Depository Trust Company’s regulations – received the broadest interest across income levels from those surveyed.
Based on data provided to the State of Connecticut by one of its underwriters, $1,000 face value bonds are relatively uncommon in the municipal market, and perhaps unprecedented in the municipal third-party certified climate bond market. As of June 2019, only about $9.5 billion of municipal bonds issued since 2017 were in $1,000 denominations; and such issuances focused on issues like housing, education and economic development.
The Legacy of “Liberty Bonds”
The name “Green Liberty Bonds” draws on the legacy of WWI “Victory Bonds” (initially called “Liberty Bonds”) and WWII “War Bonds,” whose advertising campaigns were imbued with lofty ideals. To the CGB team, “green liberty” evokes images of the Statue of Liberty, a symbol of unity, inclusion and patriotism in the U.S. In the immediate term, the bank posits, citizens who purchase the bonds gain liberty from the stagnancy of not being able to confront climate change. Eventually, CGB staff hope, if enough funds are raised and invested in the right ways, the green bonds could help people gain liberty from the threat of climate change itself. As an alternative name, CGB briefly considered “Green Victory Bonds,” borrowing the appellation used for WWI bonds, but decided against it. “We are far from victorious on climate,” Garcia said.
Like the world wars, climate change presents an urgent and daunting challenge: “an existential threat” in the words of Garcia. But there is another reason to draw on the legacy of war bonds: they were highly successful. The WWII “War Bonds,” for example, raised $185 billion (approximately $2.5-3.0 trillion in today’s dollars) from 85 million American citizens (over half of the U.S. population) a decade after the Great Depression. Of the $185 billion of War Bonds sold, the CGB estimates that about $20 billion (or $230 per person, on average) were sold to small individual investors through Series-E War Bonds; in today’s dollars, that figure equates to about $300 billion (or $3,500 per person). For context, the CGB estimates that $600-800 must be raised per person per year worldwide to adequately address climate change.
The CGB hopes that the Green Liberty Bonds, if broadly subscribed in Connecticut, will establish a precedent that encourages lawmakers to create a national green bond program analogous to the war bond programs of World War I and World War II. Jeffrey Schub, executive director of the Coalition for Green Capital, an organization which incubates green banks, sees just that potential. Schub has been supporting legislation for a “National Climate Bank,” which has been introduced in the U.S. House and Senate.
“We have written material and have talked about how a National Climate Bank could greatly increase its lending capacity beyond its original capitalization by issuing bonds and levering up its lending capacity. It's a lot easier to talk about that if its actually been done before,” Schub said.
He described the potential galvanizing effect of CGB’s issuance on national green finance efforts: "Seeing it play out and executed at the state level and specifically at the state that was the first [to form a] green bank in the country and is the one that everyone looks to sort of learn and copy from, at the federal level, it’s a really powerful precedent for us to be able to point to."
Thus far, the CGB has successfully sold certified green bonds to a single institutional investor. To create the precedent desired by Schub, the CGB will need to get many more investors – hundreds or potentially thousands – comfortable with the bonds. This will require educating the public on the bonds’ unique collateral structure.
Like the 2019 notes, the Green Liberty Bonds will be collateralized by Solar Home Renewable Energy Credits (SHRECs). SHRECs are environmental attributes which track renewable energy generation within the diffuse grid; each SHREC represents one megawatt hour generated from residential solar. Under Connecticut’s renewable portfolio standard policy, utilities are required to acquire renewable energy credits each year to demonstrate their progress toward environmental targets (29% of generation in 2020, increasing to 48% by 2030). The CGB accumulates SHRECs through its Residential Solar Investment Program and sells them to two investor-owned utilities under a fixed-price, fifteen-year master purchase agreement.
The CGB projects its SHREC inventory by forecasting electricity generation across thousands of residential solar systems in Connecticut. SHRECs ebb and flow each year based on solar irradiance. According to the CGB, last year was a sunny year and the bank is ahead of budget. The steady, contracted nature of the SHREC collateral enabled the 2019 notes to fetch an investment-grade rating from Kroll, a rating agency which specializes in esoteric securities. S&P is expected to issue a rating on the new Green Liberty Bonds.
SHRECs do not merely underpin the creditworthiness of the bonds; they also enable purchasers to make specific environmental claims in terms of emissions avoidance and improved public health. To validate this green value proposition, the CGB leans on data analytics, reporting, and third-party verification.
Last year, the CGB worked with Kestrel Verifiers to certify the 2019 notes against the Climate Bond Standard. The CGB considers Kestrel to be the “gold standard” in green bond verification and has engaged the firm to verify the new Green Liberty Bonds.
According to the CGB, the tranche of SHRECs which will secure the Green Liberty Bonds represents about 40 megawatts of solar capacity installed across about 5,000 homes. The CGB estimates that these solar systems will help citizens avoid about 600,000 metric tons of CO2 emissions (equivalent to foregoing 1.3 billion miles of car travel or planting a forest the size of 20% of Connecticut).
In structuring the issuance, the CGB intends to create a master bond indenture that can be used for future issuances. “We could see ourselves coming back to the bond market with multiple purposes, multiple times a year,” said Eric Shrago, managing director of operations at the CGB. Future issuances of Green Liberty Bonds may be secured by other types of collateral besides SHRECs, including the Commercial Property Assessed Clean Energy (C-PACE) projects.
The CGB hopes that the Green Liberty Bonds can serve as a savings vehicle for Connecticut families. Terms of the upcoming issuance are to be announced during the bond sales in April.
Since its inception in 2011, the CGB has helped attract $1.4 billion of private investment in Connecticut green energy projects by investing $260 million of public funds. This implies a “leverage ratio” of $6.50 of private investment for every dollar of public investment. If successful, the Green Liberty Bonds could create a vehicle for significant future private investment in renewables, helping the CGB to further increase its leverage ratio while providing a savings opportunity for Connecticut citizens.
Investment banks Ramirez & Co. and Stifel are advising on the issuance.
Note: Bryan Garcia serves on the Yale Center for Business and the Environment's advisory board.