1. Expenditures: $500 million spent in an environmentally beneficial way

2. Assets: $500 million of environmentally beneficial assets

In the early days of the corporate green bond market, most issuers would take route 1 - expenditures. More recently, we’ve started to see more firms take a hybrid approach, combining routes 1 and 2; so, in our example referencing $250 million of expenditures and $250 million of assets.

This is not an intuitive move, because how can you combine figures from a balance sheet and a cash flow statement? And why wouldn’t you just stick to expenditures? There are a number of reasons why looking beyond green expenditures makes sense...

• It’s often more straightforward to source and extract the relevant data
• There’s no formal requirement for a lookback period (you can reference assets you acquired or developed more than three years ago, for instance)
• For certain sectors with a sizeable tangible asset base - such as utilities and real estate for example - assets are often more financially material in size than expenditures
• It can be argued that long-dated assets generate recurring environmental benefits when compared with, for instance, operating expenditures
• It could allow for a “pure” green secured debt structure, where the green asset pool also functions as collateral

• Investors may challenge the additionality of the framework if you focus on older assets
• If you decide to sell one of the underlying assets and the green debt is still outstanding, you’re expected to identify other suitable assets or projects, which isn’t applicable with, for instance, OPEX
• No double counting is allowed, so this means you cannot select assets that have already been pledged to other creditors, for example through secured debt
• You may also be reluctant to share the value of individual assets or a portfolio of assets

The green asset-based approach is hence no panacea, but definitely worth considering.

Notes:

[1]   OPEX Operating Expense