Green bonds are issued with the stated intention of using the proceeds for green purposes. This Article is the first in-depth analysis of contractual rights to enforce performance of that intention. Perhaps surprisingly, U.S. corporate green bonds do not appear to grant investors any such rights. The Article proposes a combination of two complementary contract rights that would be triggered by green nonperformance: a “green put” that would allow investors to sell their bonds back to the issuer and a “step-up” that would increase the amount of coupon or principal that investors could collect.
The Article demonstrates, drawing on analysis of holder data from Bloomberg, that green bonds likely attract both investors motivated by the bonds’ green nature and traditional investors who buy the bonds primarily for financial reasons. The remedies the Article proposes target these two constituencies. Green-minded investors for whom it is important to provide capital only for green projects may want to exit their investment and withdraw capital from the issuer if it does not follow through. The put should be attractive to them. By contrast, investors with traditional financial objectives may prefer compensation for financial loss over exit. Insofar as green nonperformance may signal increased financial risk, such loss is plausible. The step-up provides an approximate remedy for that loss and, incidentally, acts as an issuer commitment device that reduces the likelihood of green nonperformance.
The Article’s proposal has advantages over simply making green nonperformance an event of default that could trigger acceleration. Different green-bond constituencies likely would disagree in many cases over whether to accelerate. Perhaps more importantly, issuers resist adding a green event of default because it could trigger cross-default clauses. As individually enforceable, non-default remedies, the put and step-up avoid these problems.
Contract remedies protect green-bond investors. They also help enhance the credibility of green bonds, which currently do not command a “greenium,” or premium over non-green bonds. Remedies could help induce a greenium, which would allow green bonds to attract additional capital for green transition and fulfill their purpose.
* Professor of Law and Martin Luther King, Jr. Hall Research Scholar, University of California, Davis School of Law (King Hall), jphunt@ucdavis.edu. Thanks to Andrew Bridges, Natalie Monticello, Katrina Siason, and Xia (Ada) Wu for excellent research assistance. Thanks to King Hall Dean Kevin Johnson and Senior Associate Dean for Academic Affairs Afra Afsharipour for financial support. Thanks to Katherine Florey, Robert Miller, and Shayak Sarkar for helpful conversations and comments.
The full text of this Article is available to download as a PDF.