Harvard Borrowing Goes Green
New debt financing includes first “green bond” offering.
The University yesterday issued $500 million in new bonds: not an everyday occurrence, but completely within the normal bounds of financial management for an enterprise with annual revenues exceeding $5 billion, debt outstanding of $5.5 billion, and an endowment valued at $53.2 billion as of last June 30, when fiscal year 2021 ended. More interesting is what is to come: a second, $250-million debt issue, expected to be sold in the next few weeks, on which Harvard for the first time sought, and received, outside verification of compliance with the 2021 Green Bond Principles. The proceeds of that borrowing will be used to refinance and complete the financing for the Allston science and engineering complex (SEC), phase 2 of the Adams House renewal, and renovation of the Soldiers Field Park (SFP) housing complex adjacent to the Business School campus—all constructed to high energy-efficiency and environmental standards.
A Plain-Vanilla Financing
The $500-million debt issue placed yesterday is of a piece with Harvard’s routine management of its balance sheet. Under duress, total borrowings surged from $4.1 billion at the end of fiscal 2008 to $6.3 billion in fiscal 2010 as the University scrambled for cash in the wake of the financial crisis and severe endowment and other losses. But during the past decade, Harvard’s financial managers steadily reduced the amount of debt outstanding—as well as the cost of servicing it, by taking advantage of very low interest rates to refinance when it was feasible to do so. In fiscal 2020, the University borrowed an additional $500 million in a 30-year offering, at very low rates, as a financial security measure amid the initial uncertainties of the COVID-19 pandemic.
Yesterday’s financing may be seen in the same prudential—and expedient—light. Harvard can easily service the additional borrowing. Even in the normally sedate municipal-bond market, debt costs have been rising extraordinarily quickly as the magnitude of the current inflation, and the Federal Reserve Board’s determination to combat it with swift and steady increases in interest rates, become clear. Given that Harvard’s current borrowing costs remain well below the expected return on endowment investments over the foreseeable future, and that it harbors ambitions to invest in facilities and programs, the logic of the new bond offering is clear.
The taxable, 30-year bond issue was placed at an interest rate 90 basis points above U.S. Treasury issues: just under 3.75 percent—higher than the rates available a couple of months ago, before market conditions changed dramatically, but still below the 3.9 percent weighted average cost of Harvard’s debt outstanding.
One unusual aspect of the offering was the composition of the sales group. Apparently at Harvard’s behest, the underwriting was co-led by Goldman Sachs, the University’s go-to investment bank, and Loop Capital Markets, part of a minority-owned investment bank founded in 1997 in Chicago. Junior members of the selling syndicate included two veteran-owned firms, American Veterans Group, PBC (which is a service-disabled, veteran-owned investment bank and broker-dealer) and AmeriVet Securities (a service-disabled, minority business enterprise).
Green Bonds for Green Buildings
The second part of the financing, $250 million in tax-exempt, 10-year bonds, is expected to be marketed in late April or early May. The proceeds will enable Harvard to pay down $100 million in short-term commercial paper borrowing effected in late (calendar) 2021, and to cover the remaining costs associated with the final construction of the SEC, now home to much of the School of Engineering and Applied Sciences (SEAS), and the outstanding costs for the SFP housing and Adams House phase 2 renovations. (The SEC, a University-level project, cost an estimated $1 billion; the SFP renovation and complete Adams House project, including work not yet done, will likely come in at around $600 million or more, with the Faculty of Arts and Sciences [FAS] ultimately bearing the costs of the latter.)
Since 2009, when the University put in place green building standards for its capital projects, it is likely that most of its construction (to high levels of LEED qualification, for instance), would pass muster with the Green Bond Principles (GBP). These voluntary “frameworks” used within the global debt markets are intended to identify and help finance projects that advance environmental sustainability. According to the June 2021 statement of Green Bond Principles, issued under the auspices of the International Capital Market Association, “The GBP seek to support issuers in financing environmentally sound and sustainable projects that foster a net-zero emissions economy and protect the environment.” Qualifying projects may involve, among other categories, renewable energy production or transmission, energy-efficiency investments in new or renovated buildings, pollution prevention and control, sustainable management of natural resources and land, clean transportation, climate adaption projects, and “green buildings that meet regional, national or internationally recognized standards or certifications for environmental performance.”
Issuers who wish to have their bonds certified as green, in compliance with the principles, retain a second-party verifier to examine their claims. In Harvard’s case, Kestrel Verifiers issued an opinion on April 6 that the proposed bond offering conforms with the core components of the GBP. Kestrel’s opinion notes that SFP and the Adams House work are designed to LEED Gold specifications, and that the SEC is LEED Platinum-certified. More generally, the opinion notes, the work is consistent with Harvard’s “target to be fossil fuel-free by 2050” and adheres to the University’s green building standards.
In a sense, by seeking GBP verification, Harvard is completing a circle. As Harvard Management Company promotes standards for environmental, social, and governance reporting on its portfolio investments, and pursues its 2050 net-zero greenhouse gas emission goal for endowment assets, the University as an issuer is now bringing itself under the very same standards. Thus, as other investing institutions buy Harvard bonds, they can determine what kind of environmental standards the University has set for itself, and whether its financings support those goals.
From a practical standpoint, green certification is not yet even a drop in the bucket in the United States and international bond markets. Kestrel, which reports it has been in business for more than 20 years, says it has verified $17.7 billion in bonds. The Wall Street Journal’s overview of the municipal bond market yesterday put its overall size at $4 trillion, with quarterly issuance in recent years exceeding $100 billion. Thus, although there are investment funds focusing on, or restricted to, green issues, they are too small to have any effect on the pricing available to borrowers.
So for now, obtaining a second-party green verification is principally a reputational matter for the issuer. But it is one more step toward encouraging sustainable financings and transparent, environmentally sensitive investment analysis and management. As such markets emerge, other issuers may be encouraged by better access to better financial terms for their sustainable projects. And prospective investors in their offerings, like HMC, will have better information on the underlying environmental impact and sustainability of the activities their funds underwrite. In that sense, Harvard’s pending $250-million verified green bond is a tiny step forward on a long path toward a more sustainable economy.
The Hard Work to Come
That said, enormous changes await if climate-change and sustainability goals are to be met. Even as Harvard renovates existing facilities and builds new ones to much higher standards of energy efficiency, a fossil fuel-free, net-zero-emissions world is a long way off. According to the Office for Sustainability, greenhouse gas emissions declined fairly steadily from 2006 through 2016, but then remained level through 2020. (The pandemic-induced closing of campus in March 2020, and the reduced level of operations until September 2021, mean that emissions should seem sharply lower for those periods, when reported, but will rebound given the resumption of normal activities during the current academic year.)
But a good deal of the progress reflected fuel-switching (from more greenhouse-gas-intensive energy sources like oil and coal to relatively cleaner natural gas), rather than a permanent change in building efficiency and reduced consumption. Even as energy use in existing buildings largely declined, the growth in facilities led to a net increase in campus energy consumption from 2016 through 2019. When large buildings like the SEC come online, no matter how efficient, they increase demand (unless the Cambridge facilities formerly occupied by the faculty members and lab groups who moved across the Charles River were mothballed—and even then, the SEAS enterprise is growing overall).
When he was dean of the FAS, Michael Smith noted that for all the obvious enhancements in the renovated Houses—as twenty-first-century residences, and as buildings efficient for Harvard to run—renewal did not inherently reduce their operating costs or energy use. As the residences are brought up to modern lighting and power codes, and students use more powered devices, and common spaces are air-conditioned, demand rises.
Without question, Harvard and peer institutions are modeling better, more efficient, more sustainable buildings and operations. They are also growing—in part because their investments in research and teaching on climate change and sustainability are growing. But until the world pivots toward clean, renewable energy sources, no matter what the higher-education institutions do to become greener, and to educate the green leaders of the future, their work alone cannot be enough to move the world away from severe climate change and toward a sustainable future. Rapid growth in green financing will be an essential part of the solution.