Actionable insights straight to your inbox

Equities logo

How To Use Green Bonds for Major Financing

Green bonds with gold asset backing for environmentally green projects can raise anywhere from $50 million to $1 billion.

Global Influencer

Global Influencer
Global Influencer

Pixabay, Sasin Tipchai

I met some interesting people a couple of months ago. They told me about bonds and how bonds could finance my green project without taking equity. Seriously?

Living in Canada, I expressed surprise that bonds, let alone “green” ones, were not part of my lexicon. Of course, I’m very familiar with typical funding sources—friends and family, angel investors and venture capital rounds—but bonds were not something I knew much about, and this is coming from someone who worked in private equity financing.

The Green Bond Market

There are a lot of misconceptions about bonds in Canada. They live in oblivion. No one knows how to find them, access them, how to get one or even what to expect from a bond.

The green bond market kicked off in 2007 with the AAA-rate issuance from multilateral institutions, European Investment Bank (EIB) and the World Bank. Unfortunately, while the amounts invested in green bonds continue to grow, often the money is not ultimately invested in green projects and technologies.

In marketing, we call it “green sheen” because so many companies claim to be environmentally friendly to meet the trends, but they are far from having anything green in their products.

“Green washing” is when bonds are issued by companies claiming to be working on climate change or environmental issues, while in fact only paying lip service to these ecological notions. Investment funds will doctor up a startup company to look green to secure financing, before it slowly moves into standard, non-environmental practices.

So, what the heck is a green bond? Green bonds are asset-backed loans created to fund projects that have positive environmental benefits. Most of the green bonds issued are green “use of proceeds” or asset-linked bonds. Proceeds from these bonds must be earmarked for green projects and backed by the issuer’s entire balance sheet.

IMPACT International Secured Investments

IMPACT International Secured Investments (IISI), in Vancouver, is strictly a green bond facilitator. The firm manages the bond preparation, investor outreach and the oversight of each project. IISI has a proprietary method of setting up a green bond and monitoring it. Once the company and its project are heavily vetted, the bond issuers must track, monitor and report on the use of proceeds to its investors. IMPACT has security measures in place to ensure a green project is truly green, and the monies are not diverted to other parts of a company’s holdings. They have project managers, AI reporting, visual overviews (e.g. satellite surveillance), tagging of equipment assets and even boots-on-the-ground observations.

A large company may have assets or projects in diverse and remote parts of the world requiring the company to be as forward-thinking and risk averse as possible for the issuers to feel comfortable. Thus, it’s easy for a large institution to place funds with a Bre-X or a Rio Tinto Benga operation that ends up being a scam. Still, IISI ensures that the little guy who finances via the large institutional funds is protected. IISI backs some green bonds (up to 70%) with real gold (not paper certificates) held in a third-party vault, and its physical gold mining practices are environmentally friendly.

Why Green Bonds

The experts tell me it is a bit costly setting up a bond financing because of the due diligence and feasibility studies but still is about the quarter of the price of doing an IPO. So, why not just go public? IISI Chairman, Dr. Ted Robinson, told me, “You’re not giving away any equity with a green bond.” Spread over 5, 10, or 15 years, with low-interest rates, you can pay these green bonds back anytime and without penalty.

Of course, we are not talking about chump change. If you are a small modular reactor (SMR) manufacturer trying to build a network for a small city, a green bond of $500 million might be a tempting number. Based on your projections, you can afford to pay back the bond over several years, while having the money upfront to get traction in your market.

IMPACT’s green bonds range from $50 million to a staggering $1 billion. The firm’s thinking is that too many companies are just focused on profitability without considering socially responsible projects. Investment managers are still looking for the AAA, billion-dollar deals, and if you mention climate change, they are quick to add, “Oh yeah, the project has wind and solar features to it” (probably powering the coffee machine).

Socially responsible companies begin with socially aware investors. European banks and funds currently have $10 trillion sitting, waiting to invest in guaranteed green technology. There are 180 banks and institutions with funds earmarked for social financing. So, what’s the problem?

The Green Problem with Green Bonds

Hold on! The money is sitting there because there are not enough vetted companies to be funded by the green bonds. We are at an inflection point in our planet’s health. We need to get past the cyclical closed-loop system of financing the same old thing and get completely outside the box. Institutions need to find vetted investments that meet the requirements of their issuers and get away from the brokers and fund managers who keep funding the polluters.

Is IISI making an impact (pun intended)? You bet! The firm is currently placing a bond with Güssing Renewable Energy, an Austrian company mainly dedicated to the development of waste-to-energy electric power plants. The company is currently raising Green Bond Financing of $245 Million to complete the development phases of three new projects in India, Thailand and Austria. Impact’s Gold Production Security will supply coverage for 70% of the bond offering. The bond term is 14 years, and the projects are expected to be operational by 2021.

Is IMPACT relevant? Of course! With a sizeable green bond placement in Perwira Top Glove, IMPACT is not only trending with Covid-19, but with climate change as well. Perwira produces a superior surgical glove that I’ve heard is the best biodegradable glove on the market with tremendous growth potential. With IMPACT’s collaboration, it is in full operation currently and expanding production to the UK, Germany and Canada.

With all the talk and conferences about climate change, I’d expect more to be done. There are dozens of green projects that are desperate for financing, yet governments sit on their hands. They claim to help but put so many obstacles in the way that it’s hardly worth going after their funding. If the Canadian government provides assistance, it’s usually not enough to complete any project, let alone get it started in a big way.

How do we fund the big game-changers out there? How can we convince institutional lenders that green technology is not only fundable but profitable?

IMPACT is building a visionary pipeline, a green financing pipeline that hopefully can make the difference for a lot of companies with great ideas and tremendous potential.


Equities Contributor: Gary Bizzo

Source: Equities News

A weekly five-point roundup of critical events in fintech, the future of finance and the next wave of banking industry transformation.