Massachusetts 1st State to Issue "Green Bonds"

Modeling its program after the World Bank, this week Massachusetts became the first state in the country to issue "green" municipal bonds.The tax-exempt bonds will be part of a $1.1 billion general-obligation issue that also includes $640.3 million for refunding debt.

In 2008, the World Bank rolled out its "Strategic Framework for Development and Climate Change" which was designed to galvanize private and public sector financing to help mitigate negative impacts of climate change as well as reduce poverty and assist local economies while generating economic returns for investors. The program, to date, has loaned roughly $3.5 billion for 56 different projects and the green bonds maintain a AAA credit rating similar to other bonds issued by the World Bank. One difference is that the Bank itself, not the project, has the obligation to pay back investors.

According to a news account in the Wall Street Journal, Massachusetts issued $100 million in 20-year bonds with interest rates varying between 3.20% and 3.85%. The investment ratings service Moody's has given the new bond issue it's second-highest rating at Aa1. Over 150 individual investors and 29 institutions interested in environmental stewardship placed $130 million in orders with the proceeds going to various public works projects designed to improve water quality, energy efficiency and pollution abatement. State Treasurer Steven Grossman said in the story, "This was to some extent an experiment," and "I've always seen part of what we do is to use Treasury as a laboratory for experimentation and innovation." 

Although using proceeds from bond sales for environmental restoration projects is not unusual,  the move by Massachusetts is the first time a time a state has specifically marketed the sale as a "green bond." The terms of the bond are not structurally different than traditional debt sold by states, in that the full faith and credit of the state's general obligation backs payment to bond holders. Massachusetts state officials expect to issue more targeted green bonds to investors specifically interested in environmental stewardship projects to meet what they believe will be growing financial demand.