As climate-related events, including wildfires, become more prevalent throughout California, investors and issuers alike are looking for new tools to protect the state from increasingly devastating environmental disasters. At the same time, municipal officials are engaged in sustainable infrastructure projects to better accommodate California’s growing population, including the extension of the Los Angeles Metro Rail network.

This environmental push isn’t exclusive to the state of California. According to The Forum for Sustainable and Responsible Investment, $12.0 trillion—over 25 percent of professionally managed assets in the US—was invested in environmental, social, and governance (ESG) strategies throughout the nation in 2018. That’s a 38 percent increase since 2016. 

Green bonds, one financial instrument of ESG investing, are rapidly growing in popularity. A green bond is a traditional fixed income security whose proceeds must be earmarked for environmentally friendly projects. While green bonds are currently a relatively small percentage of both the overall bond and ESG markets, preparing the market for future growth is central to its success.

This report, a follow-up to Growing the U.S. Green Bond Market: Volume 1 (by then-Treasurer John Chiang) and Volume 2 (by the Milken Institute), discusses ways to accelerate the growth of the US green bond market. For California at least, a willingness to set clearly defined metrics and pricing incentives will attract more investors to this increasingly important market, allowing it to grow at both the state and national level.