When I first heard the term “green bonds” several years ago, I tried to find a definition for the term, but could not. There were multiple examples of how “green bonds” could be used, for things like mass transit systems, wetlands preservation, etc. But there was no “standard” definition per se.
So what qualified as “green”? I understood the general nation that a green bond was environmentally friendly, but what exactly did that mean?
If a state built a bridge that cuts 40 miles off a daily commute each way, and thereby cuts gasoline usage for 100,000 commuters a day, is that a “green” project? What about a municipality cleaning up a landfill? What about financing a low-emissions film production studio as part of a state’s industrial policy?
Therein lies the problem with the market’s ESG—Environmental, Social, and Government investing—trend.
ESG “standards,” to the extent they exist at all, are nebulous, subjective, and indeterminate. Those standards that do exist are voluntary and largely discordant with one another.
Elon Musk’s recent dustup with the S&P 500 ESG Index makes the case. Tesla was dropped from the index for having its “ESG score” downgraded on allegations of racial discrimination at Tesla’s Fremont plant and some crashes of its autonomous vehicles. (Coincidentally, Tesla was dropped almost at the same time as Musk declared he was voting Republican.)
Although scientists say climate change may present a catastrophic—and perhaps even existential—threat, bond issuers are pitching investors, institutions, and pension funds the “environmental,” or “E,” element of ESG bonds the same way that “organic” was pitched to grocery shoppers back in the 1980s.
We in the United States can take a lesson from what we did on organic products to create similar defined, measurable, empirical, and determinate standards for environmental investment to ensure the “E” segment of ESG means something.
Notably, neither the EU nor the ICMA standards conflate “E” investing with the “social” and “governance” standards, so environmental investing can be isolated from both those issues.
Another Path
It’s time for the United States, the EU, the UK, and our allies in Asia to harmonize and codify “E” standards that would be required, not voluntary, to issue bonds bearing that designation in U.S. and foreign securities markets. Investors who hold bonds from companies complying with the “E” standards should be incentivized to do so, perhaps by exempting some portion of the interest payments from federal income tax. For bonds issued by state and local governments, which can be federal tax exempt, E bonds might be structured so that interest payments generate a refundable tax credit to holders.But the United States can and should go further to integrate sustainable finance into U.S. investment and trade policy, including an emphasis on the “global” aspect of what used to be called “global warming,” by imposing a uniform standard of climate-friendly manufacturing business practices on countries that currently abuse them.
The CBAM would impose tariffs on foreign goods imported from countries that are not manufactured, or services that are not performed, in a manner that is consistent with U.S. environmental standards. But unlike the EU CBAM, which imposes the tariff on the importer, the vision I hope to see realized by the USA and our trading partners imposes tariffs on the foreign exporter as a condition of importation into, or a grant of visas to perform services in, the USA. The burden for non-compliance should belong to the foreign producer, not the U.S. consumer.
Conclusion
As I’ve written previously, President Joe Biden and his fellow Democrats, who relentlessly posture as champions of environmental policies, all seem to think “global warming” activities are limited to those that occur within U.S. airspace. Doing so has forced U.S. production overseas in a fashion that enables and enriches countries like China and Venezuela, who have geopolitical and economic interests hostile to our own.The Biden administration, for example, has urged Venezuela, an ally of our mortal enemy Iran, to produce more oil to counter inflation in U.S. petrochemical markets. Most recently, the Biden administration has made clear its intention to drop the tariffs former President Donald Trump imposed on Chinese imports to reduce inflation.
Biden is set exactly on the wrong course.
Instead of following Biden’s policy the next Congress—likely to be Republican, if current polls are to be believed—should set clear deadlines to codify the “E” standard of ESG, including tax incentives, as set forth above and prohibit the sale of purported “E” bonds that do not meet that standard by the first day of 2024.
Both these steps would not only improve the environment, but encourage companies to re-shore production to the United States and North America or to countries that observe our standards of environmental protection.
We’re at a time when we can and should address both.