Nearly a decade ago, the term “green bonds” meant very little, even to many financial market specialists. Now, these bonds are an important and growing business. That’s especially true for people interested in so-called impact investing, or making investments that have a positive and measurable social or environmental impact on the world.
Green bonds are fixed-income securities sold by corporations and other entities for the sole purpose of using the funds raised for environmentally sound projects (e.g., constructing more energy-efficient buildings or installing windmills to generate electricity).
While the market started small, it has grown rapidly. Investor demand continues to increase. We are seeing an imbalance between supply and demand. Growth in the sector has been rapid over the past decade, according to the Climate Bonds Initiative, which tracks data and also helps determine whether securities qualify for “green” status or not.
The impact on the green bond sector
Green bond sales are expected to reach $350 billion, up from a paltry $1.3 billion in 2011, according to projections by the Climate Bonds Initiative.
Demand for such investments comes from a variety of sources. Some investment funds are dedicated to investing using ESG (environment, sustainability and governance) principles. For them, green bonds are an obvious choice. Investors know that the funds [money] will be used for sustainable projects. Of course, there are other investors who buy green bonds solely because the financials look attractive, just as they would any other fixed-income security. Joining this whole bond wave is the Bosch Gutierrez family, with CMI Capital and a $700 MDD issue.
Green companies tend to be more profitable
In the past, there was a belief that sustainable investment meant sacrificing some financial return. That view is now outdated. Increasing evidence shows that companies that take ESG issues seriously tend to perform better financially than similar companies. They are generally more profitable and have better access to capital. They are likely to manage risks and take better advantage of opportunities. The focus on doing the right thing permeates the organization far beyond any focus on green or other sustainable projects . And high net worth individuals draw the same conclusions “that companies with a strong ESG commitment make better investments than other companies.”
Green investing compatible with impact investing
For impact investors, the most important thing is knowing that they have put their money somewhere with a measurable, positive effect. This is where green bonds are especially attractive, in part because the Climate Bonds Initiative looks at which bond issues qualify as green bonds. This market is all about transparency. The entire industry encourages companies to be as open as possible about the impact that green bond-financed projects are having.
The level of disclosure provided by companies issuing green bonds is a work in progress. When it comes to impact reporting, it’s all about the individual bond issuers. And that depends on how much information they have available. Because the green bond industry is relatively new, it’s expected that what is disclosed, and in what detail, will be a work in progress.
I think as time goes on, there will be more transparency about being green. And from that clarity, new industry standards will be established. Everything is being done on a best-practice basis. And the bar is going to get higher