ENVIRONMENTALLY-FRIENDLY INVESTMENT TOOLS are gaining traction in markets around the world, but is the momentum sustainable?  A new Harvard Kennedy School (HKS) faculty research working paper examines the growing popularity of “green bonds” and their potential to contribute to important land conservation efforts in the years ahead.  “Green Bonds and Land Conservation: The Evolution of a New Financing Tool” is co-authored by Carolyn duPont MPA '16, Linda J. Bilmes, Daniel Patrick Moynihan Senior Lecturer in Public Policy at HKS, and James N. Levitt, director of the Program on Conservation Innovation at the Harvard Forest, and research fellow at the Ash Center for Democratic Governance and Innovation.   

The green bond market has exploded over the past decade. Last year alone, more than $37 billion in green bonds were issued by institutions ranging from the World Bank to the Commonwealth of Massachusetts. 

“We wanted to understand what types of projects are being funded using this vehicle and how investors view them in a portfolio,” Bilmes writes. “For example, are they seen as a ‘niche’ product for initiatives that would have been funded anyway, or is this something truly new? And how much potential is there for Green Bonds to develop into a significant source of capital for environmental and conservation opportunities?”

Bilmes and her research team analyzed market transactions for green bonds over the past decade and conducted interviews with issuers, investors, land conservation finance experts, credit agencies, state officials and other stakeholders.  They also conducted two detailed case studies -- examining the impact of a $750 million green bond project in Massachusetts and a $200 million project in China which was financed using green bonds. 

The researchers found that there are some significant challenges standing in the way of green bonds becoming a major source of conservation finance.

“These include the difficulty of articulating clear cash flows from many conservation projects, and how these projects will generate returns for investors,” Bilmes writes. “We found that the majority of the best revenue-producing conservation projects would be funded anyway, regardless of the ‘green bond’ label.  At the same time, green bond issuances have been significantly and consistently oversubscribed, so some experts predict that such high levels of demand will result in an increased willingness to pay a premium for green bonds, which will increase their attractiveness.”

The authors identified a number of best practices they believe will help ensure the viability of green bonds for land conservation purposes, finding that they would be especially suitable for storm water/watershed management and state/local issues.

“One of the biggest challenges in conservation is that markets have not traditionally valued protecting natural capital.  Worldwide there is a growing awareness of the need to maintain healthy ecosystems, but where will the capital come from?  Green bonds are a young and growing addition to the conservation finance toolkit, so it makes sense to evaluate how they are performing,” the authors conclude.  “Our study shows that they can be successful, if the issuers can identify significant opportunities that can generate returns for investors. However, simply adding the label ‘green bonds’ is not sufficient to guarantee those conditions.”

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