Quantifying the impact of green bonds: using life-cycle assessment to measure comprehensive financial and environmental return on investment

ABSTRACT

Green bonds are increasingly being used as a tool to finance projects related to climate change mitigation. Yet despite both a dramatic growth in demand and improving policy standards, there remains a gap between the activities these bonds finance and the quantification of their associated greenhouse gas (GHG) reductions. We present a new framework to help overcome these challenges, one that combines life-cycle assessment of impact reduction activities alongside traditional financial return on investment (ROI) metrics. We provide an example of this approach by quantifying both the potential financial and GHG return on a billion-dollar investment in anaerobic digesters, biochar facilities, and solar energy for the Minnesota dairy industry. Our results illustrate clear financial and GHG tradeoffs of alternative project investments and our discussion highlights how our new approach aligns with emerging policies, such as the EU Green Bond Standard, that aim to reduce greenwashing and achieve authentic GHG reductions.

KEYWORDS:

• Green bonds
• life-cycle assessment
• environmental ROI
• dairy industry
• GHG mitigation

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 See section 2.4, 140–154 for guidance on Agriculture: Livestock production.

2 Ideally this would be done using optimization framework that selects the subset of projects that meet specific ROI and EROI targets. Multiple bonds could be released with different combinations of these targets marketed toward investors with different expectations (i.e. those who favor higher ROI vs. those who favor higher EROI). See the continuing research in the final section of this paper for further discussion.

3 In our case study, we have used unlevered returns for our calculations so that they are easily comparable. The introduction of a green bond would result in leverage, but the amount of leverage could be expected to vary significantly depending on project type, issuer type, and other variables. Unlevered return estimates provide a conservative reference point for project comparison.

4 As already noted, this is unlevered ROI based on the operating profit of the project before any debt service. The returns on equity capital would vary depending on the extent of leverage in the project.

5 Technical Annex to the TEG Final Report (EU Technical Expert Group on Sustainable Finance 2020), section 2.4, page 140.

6 Last six rows should be deleted, these are duplicates

Additional information

Funding

This work was supported by the Institute on the Environment at the University of Minnesota as part of their 2020 Impact Goal grant program.