BlackRock Borrows Against Diversity

The basic idea of green bonds is that some investors want to finance environmentally friendly projects, for reasons of their own, and they are willing to pay more to do so. So if a company can issue bonds at a 4% yield to finance its regular business, perhaps it can issue green bonds at a 3.9% yield to finance its green projects. There is extra demand for sustainable finance — demand from individual investors who care about sustainability, or from institutional investors with sustainability goals in their mandates — and so issuers of green bonds can get a “greenium,” that is, get more money at lower interest rates than they could by issuing regular bonds.

In principle you could do the same thing with any other environmental or social goal that people care about. If investors care about diversity, for instance, you could issue a bond saying “we will use this money to create a more diverse workforce,” and investors would charge you a lower interest rate for it. Or, since that doesn’t exactly make sense — it’s easier to earmark specific money for green projects than it is for diverse hiring and promotion — you could issue a bond saying, like, “we will use this money for regular stuff, but we will also create a more diverse workforce.” One way to do that would be to have a contingent interest rate: “We’ll pay you 3.9% interest if we hit a set of diversity goals, or 4.1% if we don’t.” That way investors who care about diversity will get what they want (diversity) at the cost of giving up some economic return; also, the issuer will be incentivized to do what those investors want (become more diverse) in order to save money.