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How can green bonds help companies overcome costs to go green?

AskWaves explores funds dedicated to environmental projects

(Photo: Jim Allen/FreightWaves)

Green bonds are funds that are raised with the specific goal of improving a company’s environmental sustainability. They often support the adoption of assets or practices that lead to lower greenhouse gas emissions.

One of the largest barriers to adopting emissions-reduction technologies in the transportation sector is the high initial costs. Many sustainable solutions, such as electric vehicles, have higher upfront costs but lower total costs of ownership than conventional solutions. But the lower overall lifetime cost of assets such as EVs is irrelevant if companies don’t have the funds needed to purchase them.

Green bonds can help companies get the upfront capital they need to invest in sustainable technologies. Meanwhile, investors that decide to purchase green bonds can have confidence that their investments will go toward emissions-reduction technologies and environmental projects.

The first issuer of green bonds, The World Bank, has raised $16 billion in green bonds through 185 transactions in 23 currencies between 2008 and June 2021, according to its annual report. In 2020, clean transportation accounted for 27% of the bank’s issued green bonds to date.

Norfolk Southern’s green bonds

Norfolk Southern (NYSE: NSC) closed a $500 million green bond offering in May. The railroad is planning to use the money for several decarbonization projects, such as modernizing its locomotive fleet, updating its energy management technology and investing further in intermodal, Josh Raglin, chief sustainability officer at NS, told FreightWaves.

“It allows us to go out and finance projects at a little bit lower interest rate, so there’s a benefit for Norfolk Southern from a financial standpoint and a benefit for the investors, as they’re able to put their money in a safe investment with a good return,” Raglin said.

NS received demand more than three times the $500 million offering from investors, Raglin said. He said this “goes to show you the demand in the marketplace right now” among investors for funding green projects.

NS is using a green financing framework to outline the company’s green bond allocation process. Raglin said NS will also publish an annual green bond funding report on its website.

Read: Why is reducing emissions in freight so hard?

Green bond caveats

Green bonds have potential to provide benefits to both investors and companies by supporting industry movements toward sustainable solutions. However, there is some debate about the effectiveness of dedicated green bonds.

While the funds are largely allocated to projects that lower emissions or benefit the environment, there’s no guarantee that green bonds improve a company’s overall level of sustainability.

In theory, a company could issue green bonds to fund a project that lowers GHG emissions in one area, but it could be increasing its emissions in another area of the business. A company with green bonds could also fall short in areas of social sustainability.

Instead of green bonds, Bergen, Norway-based chemical storage and ocean transportation provider Odfjell SE uses sustainability bonds. The margin of Odfjell’s sustainability bonds is  linked to a set of key performance indicators and sustainability performance targets, Øistein Jensen, chief sustainability officer at Odfjell, told FreightWaves in a previous interview.

Jensen said that green bonds have to go to specific environmental projects, while sustainability bonds could fund projects that boost other sustainability metrics such as safety or diversity. He also said that sustainability bonds have to improve every year.

Click here for more FreightWaves articles by Alyssa Sporrer.

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Alyssa Sporrer

Alyssa is a staff writer at FreightWaves, covering sustainability news in the freight and supply chain industry, from low-carbon fuels to social sustainability, emissions & more. She graduated from Iowa State University with a double major in Marketing and Environmental Studies. She is passionate about all things environmental and enjoys outdoor activities such as skiing, ultimate frisbee, hiking, and soccer.