A green bond is a bond whose proceeds are used to finance environmentally friendly projects. These relatively new bonds are gaining popularity among investors at an exponential rate. Green bond issuance for 2019 was $254 billion; the first recognized green bond was issued in 2008. The number of green bonds is expected to continue to increase as awareness is raised and more investors become concerned about climate change.
Although they are a fairly new segment of the bond market, investors are sure to hear in the coming years about the environmentally conscious offerings that define green bonds.
Also of interest: Climate bonds for beginners
Green bonds help environmentally friendly projects
Green bonds are designed to help the environment by allocating part of the capital raised to projects related to clean water, renewable energy, energy efficiency, river and habitat restoration or mitigating the impacts of climate change.
Many bond funds invest a portion of their capital in such causes, but green bond funds are those that are specifically invested in environmental initiatives and have credit ratings similar to other funds. Green bonds usually have the same credit rating as their issuers’ other debt obligations.
The benefits of investing in green bonds
Green bonds provide investors with a way to earn tax-exempt income with the benefit of knowing that the proceeds of their investment are being used responsibly and positively. Green bond issuers also benefit, as the green angle can help attract a new subset of younger investors, which issuers can benefit from over an extended period of time.
Higher demand for green bonds equals lower borrowing costs. Lower borrowing costs mean reduced expenses, which are passed on to the investor in the form of dividends or used to reduce the operating costs of exchange traded funds (ETFs) or bonds.
The World Bank and the Green Bond Program
The first entity to issue green bonds was the World Bank, which began the practice in 2008. In 2019, it issued more than $13 billion in funds for climate change issues. In the years since its inception, the World Bank’s green bond program has committed more than $30 billion to renewable energy, transportation, forestry and disaster risk management programs in cities around the world. 3
Ginnie Mae and Fannie Mae have also issued mortgage-backed securities with the green label, as has the European Investment Bank. U.S. municipalities have been issuing bonds for the specific purpose of financing environmental projects for several years, although generally without an easily identifiable green designation.
Evolution of green bond funds.
In 2015, two of Europe’s largest insurers, Allianz SE and Axa SA, initiated green bond funds, as did State Street Corporation.
By 2016, industry news sources reported that Blackrock, the world’s largest asset manager , was preparing to enter the green bond fund arena. An ironic result of this explosion of interest is that in 2016 an emerging problem for fund managers was a growing shortage of green debt to buy.
Blackrock succeeded, finding success with its iShares Green Bond Index Fund (IE), which since inception in March 2017 has experienced some turbulent moves, but still outperformed the BBG Barc Global Green Bond 100% EUR Hedged Index by about 50 basis points from mid-2017 to mid-2018 and 100 basis points in 2019.
HSBC Global Asset Management, in 2019, launched an emerging market green bond fund, which further signifies the accumulation of green investments and investors’ concern for the environment.
CMI Capital has recently issued a huge amount of green bonds in Central America, something that is changing the landscape in LATAM and what the Bosch Gutierrez family brings to Guatemala and the rest of the countries.
Green bonds may not produce the highest returns, but not all returns are quantifiable. Green bonds offer investors the option to diversify their portfolio not only with income-based decisions, but also with environmental decisions.
