Hello from New York. About $2.6tn of green bonds have been issued by countries and companies all over the world. But the world’s biggest bond issuer — the US government — has been noticeably absent from the green bond party. Is that about to change?
Also today, with renewable power purchase agreements surging, Simon looks at the increasingly urgent debate over how companies should account for them in their books.
Thanks for reading. — Patrick Temple-West
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Sustainable finance
Major banks recommend US Treasury issues green bonds
In 1942, Bugs Bunny danced and sang on movie screens to encourage Americans to buy US Treasury war bonds. (The clip of the jingle is here. I won’t judge you for watching it at work, if you don’t judge me for how I procrastinate.)
Irving Berlin wrote Bugs’s song at the request of Treasury secretary Henry Morgenthau Jr as part of a celebrity-soaked propaganda campaign to fund the war. Incredibly, 85mn people — more than half the US population — had bought war bonds by the time the second world war ended.
War bonds were revisited after the 9/11 terrorist attacks when the US issued special “patriot bonds” to fund the war on terror. Clearly, the US has a history of issuing special-purpose debt — typically for war.
Now, Deutsche Bank, Citigroup and other global financial companies have recommended that the Treasury department consider issuing its first ever green bonds. In a report last week, a Treasury borrowing advisory committee comprised of financial companies noted that the US was the only major developed country that had not issued green bonds. The UK, for example, had issued $65bn.
By issuing green bonds, the Treasury could tap into a pool of investors, such as foreign pension funds with big target allocations for green investments, that might not invest in typical US debt. This demand could be strong. Only 22 per cent of outstanding green bonds are denominated in dollars, whereas half are denominated in euros. Additionally, a small difference in interest costs, known as the “greenium”, could save the Treasury money on the cost of this debt.
But issuing green bonds could have complications, the report said. For starters, green bonds need green projects to fund, and government investment on this front could be complicated by the politicisation of climate change. Still, the political controversy around climate change and green investing might have limits even if the Republicans took control of Washington later this year, Morgan Stanley said in a separate report on May 3.
“Regardless of the [political] administration in Washington, we think there is likely to be a base level of federal green financing that could be earmarked for a green bond,” Morgan Stanley said. “There is a high-enough minimum environmental expenditure per year by the federal government that a program could be designed to be independent of the party of the administration.”
France, Germany as well as US neighbours Canada and Mexico had all successfully issued green or sustainable bonds, underscoring the viability of this type of debt, said Anne van Riel, Americas head of sustainable finance capital markets at BNP Paribas. US Treasury green bonds, she told me, “could bring additional demand from foreign investors”.
A Treasury spokesman declined to comment.
Even if the Treasury embraced green bonds, it would be years before any of these securities were issued, the report said. Still, amid the ongoing debate about how best to raise money for climate resiliency and mitigation, US green bonds seem like a viable tool.
A little publicity from a well-known wabbit might help too. (Patrick Temple-West)
renewable energy
Tackling the ‘noise’ in green energy accounting
Surging corporate demand for renewable energy might be good news for the planet, but it’s been creating headaches for accountants. A proposal published today by the International Accounting Standards Board is aimed at making their lives a little easier — but has drawn pushback within the body’s top ranks.
As companies have jostled to secure renewable energy supplies, many have signed deals obliging them to take all the electricity produced by a wind or solar plant — which, given the intermittency of wind and sunshine, can be highly variable.
If the amount received at any stage exceeds the company’s requirements, it has to sell the excess electricity on the market. And if a company makes such sales, it needs to treat its electricity contract as a financial derivative — and value it accordingly — under the current guidelines from the IASB, which is the most widely followed accounting standard-setter worldwide.
If a company has agreed to buy electricity at a stated price, the book value of this contract will rise when the market electricity price goes up, and drop when it goes down. This “fair value” accounting of electricity contracts can lead to swings in corporate accounts which, some worry, can distort the picture they give of a company’s finances.
The new IASB proposal aims to fix this by giving a special exemption for renewable energy purchase agreements, enabling buyers to account for such a contract as a normal purchase rather than as a financial derivative, even if they sell some of the electricity provided. This comes with conditions intended to ensure that the exemption goes only to companies that purchase electricity in order to use it, and sell any surplus — rather than those deliberately setting out to trade in the electricity market.
The current accounting rules around renewable energy contracts have been creating “a lot of noise” in financial accounts, IASB member Patrina Buchanan told me. Buchanan was one of 12 board members who approved the draft proposal. But it was opposed by two others.
In a dissenting opinion, Bruce Mackenzie and Robert Uhl argued that the proposed exemption was inappropriate given that renewable energy purchasers typically knew full well at the outset that their demand would sometimes be less than the contracted supply.
The proposal “appears to be more lenient towards contracts for renewable electricity than those other contracts”, they wrote. “For the financial statements to be faithfully representational, accounting should be neutral.”
The proposal is now open to comment for 90 days — slightly shorter than the 120 days typically allowed in such processes, owing to “how urgent it is for some stakeholders,” Buchanan said. “We’re moving more quickly to be responsive to how quickly the market is moving,” she added. (Simon Mundy)
Smart read
As the shift away from combustion engines threatens to leave a $110bn hole in government revenues because of a drop in receipts from fuel duties, our Energy Source colleagues explain why electric vehicles are becoming more expensive as a result.
