Unlike traditional fixed-income securities, green bonds offer the assurance that the funds will be used to enhance sustainability. Constraints to their wider use include a lack of standardization and the difficulty of listing them on indexes tracked by large investors. Expanding the market will require policy changes and new approaches in financial markets.
"In California alone, we face a funding gap of over $400 billion over the next ten years to address our state's infrastructure needs," explains State Treasurer John Chiang. "Green bonds are a financing tool that can help replace our existing infrastructure with greener, carbon-free alternatives. This report not only contains concrete and actionable recommendations that could make a thriving green market a reality, but which could also help us make great strides in the fight against climate change."
Among the recommendations:
- Establish a "Responsible Issuer Program" to support municipal issuers.
- Facilitate a green bond insurance program to help debt-averse municipalities.
- Create a green bond bank.
- Evaluate the creation of taxable green bonds to increase yields.
- Aggregate smaller issuances to attract larger investors.
"It takes an innovative collaboration between policymakers and the financial markets to streamline and grow the green bond market," adds Caitlin MacLean, Milken Institute senior director for innovative finance. "Because California is widely recognized as a leader in environmental sustainability, pioneering efforts here can serve as a model for other states and countries."