Henry Shilling: Are Tesla’s Senior Notes Green?

Since the announcement on August 11 and successful placement of Tesla’s $1.8bn of senior notes, rated B3 by Moody’s Investors and made available to qualified institutional buyers only, some disappointment has been expressed around the fact that Tesla didn’t formally qualify as green the company’s newly issued notes. It was suggested that issuing designated green bonds (or notes, in this instance) would have been a way to highlight Tesla’s obvious green credentials for the benefit of an investment community that’s thirsty for green bonds. A formal green bond designation would certainly have been noteworthy, especially in the US where there has been, and continues to be, more limited corporate green bond issuance. A green bond label for a high-profile issuer like Tesla would have also served to sustain and even elevate awareness of climate change risks and needed mitigation efforts, particularly given the recent environmental policy shifts in the US. Moreover, such a designation would have potentially qualified the bonds for investment by a larger segment of the sustainable investing universe, consisting of various actively and passively managed funds and separate accounts, which is being hamstrung by limited supplies of green bonds. In the first half of 2017, about $49.1 billion in green bonds have been issued. That said, it seems difficult to argue that Tesla’s notes, and other fixed income instruments with similar profiles, are not green, on their face, even if the offering does not embrace the Green Bond Principles (GBP). After all, Tesla is on a mission is to accelerate the world’s transition to sustainable energy and it is leading an electric automobile revolution that could eventually bring about a material reduction in greenhouse gas emissions. This argues that even if the bonds are not formally designated as green, the Tesla notes, and other bonds with similar profiles, should be considered as such by investors.

Tesla’s Senior Notes

Tesla did not formally integrate the GBP best practices into its offering and as such the company’s senior notes were not qualified as green. That said, Tesla intends to use the net proceeds from this offering to strengthen its balance sheet during the period of rapid scaling with the launch of its Model 3 electric vehicle – a lower priced sedan designed for the mass market – and for general corporate purposes. The company’s core strategy, as set forth, in part, in periodic regulated and sufficiently transparent financial disclosures such as its 10-Ks and 10-Qs, is to design, develop, manufacture, and sell high-performance fully electric vehicles. It also designs, manufactures, installs and sells solar energy generation and energy storage products and energy products. It is currently producing and selling a Model S sedan and a Model X sport utility vehicle and the sales of these vehicles represents the firm’s primary source of revenues, even post Tesla’s Solar City merger.Beyond electric automobiles, the company’s other lines of business include alternative renewable energy products for residential and commercial applications, also eligible project categories under the GBP. While Tesla is not committed to disclosing environmental benefits and impacts in line with the GBP best practices, it’s not difficult for investors to conduct a simplified back of the envelope calculation of the minimum potential environmental benefits associated with its automotive activities alone. For example, according to the Environmental Protection Agency, the annual estimated emissions sourced to a typical passenger vehicle in the US is 4.7 metric tons of CO2. Assuming that each of Tesla’s electric vehicles displaces a typical combustion engine passenger vehicle, the sale of Model S and Model X vehicles in 2017, conservatively estimated at 94,200, is already contributing to emissions savings of about 442,740 metric tons of CO2 per year. By the end of 2018, this could be increased to 2.35 million metric tons of CO2 per year, based on Tesla’s optimistic production projections, some hold, and contribute toward the reduction of emissions in the transportation segment that accounts for about 32% of total US CO2 emissions.

Conclusions

Financial risk considerations aside, green bonds are uniquely suited to meet the objectives of investors focused on environmental considerations supporting the Paris Climate Agreement objectives of keeping the Earth’s surface temperatures from rising above 2°C as well climate-related risks and opportunities. While this may not be the case for all issuers, and in particular bond offerings with limited disclosure, the Tesla notes – even if they were not qualified as green – are consistent with a green mandate and a 2°C scenario. Regrettably, the Tesla notes were only made available to qualified institutional investors; and retail investors were excluded from investing in these debt instruments directly. They could, however, do so indirectly through mutual funds and ETFs that might have purchased these notes. At the same time, the broader universe of sustainable investors, including any with ESG mandates, for example, will also have to address any Tesla specific governance and social considerations before deciding to invest in the company’s notes.

Henry Shilling retired from his role as Senior Vice President and Head of ESG at Moody’s Investors Service earlier this year. He now runs his own ESG consultancy, Sustainable Research and Analysis.

A longer version of this article was originally published here.