What Are Green Bonds and Should You Invest in Them?
The past decade has seen the emergence of a global market in green bonds.
The concept is easy to grasp – bonds that raise funds for environmental projects. But deciding whether to invest in them needs a more in-depth understanding.
The Basics of Green Bonds
Battling the effects of environmental damage costs money. Green bonds are a way of raising that money from investors.
The big appeal of green bonds is that they let us use the structures of the market to undo some of its damage, rather than relying on individual action.
Green bonds tap into the system of global investment to mobilise large amounts of wealth.
The global market in these bonds rose from $4.2 billion in 2012 to $176.6 billion in 2018 as issuers and investors got on board.
Green bonds currently represent a drop in the ocean both of the bond market, which is worth over $100 trillion, and of what’s needed to meet green goals – Europe alone needs over $200 billion per year.
But the opportunity to use the market to help save the environment is a powerful and appealing one.
Projects Supported
Green bonds support projects that have positive environmental effects, often around climate change.
The highest profile types are those tackling energy production and transport, which are contributing hugely to environmental destabilisation.
But there are other important areas too, such as building design and recycling.
Green bonds are connected to but different from sustainable bonds.
Sustainable bonds cover environmental and social issues, while green bonds are always environmental in their focus.
But as anyone involved in environmental campaigning can tell you, environmental harm impacts the poorest sections of society the most, and so protecting the environment also helps bring social justice.
Sources of Green Bonds
Green bonds come from a variety of sources.
Governments, such as those of Poland and South Africa, have raised money for environmental projects within their countries or regions.
Companies have issued green bonds. Some come from businesses with a dedicated environmental agenda, while others come from more traditional companies that have decided to involve themselves in green industries.
International institutions such as the World Bank and European Investment Bank have issued green bonds.
Despite its status as one of the world’s biggest polluters, the US has become the largest source of these environmentally-friendly bonds.
The country’s colossal wealth means that it plays a disproportionate role on both sides of environmental action.
Regardless of their source, green bonds are usually investment grade and with similar pricing to conventional debt.
Protecting the earth doesn’t involve compromising on profit.
Judging Greenness
Judging how green these bonds are is a challenge.
Given the high profile of environmental problems, some companies inevitably issue bonds that represent PR and not real action – what’s referred to as greenwashing. There are real debates over what should count – for example,
China gives a green label to coal powered projects if they reduce pollution compared with predecessors, while climate research institute Cicero rejects this, as coal power doesn’t contribute to long-term sustainable change.
And the question arises of whether to consider the issuer’s overall environmental impact or just what this bond will fund.
Regulators are grappling with the problem, and in the meantime, a variety of options are available to help investors judge green bonds.
Many issuers claim to follow a set of voluntary standards called the Green Bond Principles.
The challenge with this or any standard is how you prove compliance. Organisations offer services to assess greenness.
These range from ratings company Moody’s to climate research institute Cicero.
Each has a different agenda. As the housing crisis showed, ratings companies are entangled in supporting business, while an environmental research institute will be more critical, so it’s important to consider who’s providing an assessment.
There are different ways of judging greenness.
Cicero offers a relatively sophisticated approach, with varying shades of green depending on the long-term impact of an investment.
The Future of Green Bonds
As a relatively new part of the market, green bonds are going through a lot of change. Both the EU and ISO are working on international green bond standards.
These should improve consistency in judging the greenness of bonds. The use of green measures is set to spread further into the bond market.
In 2015, France made institutional investors start reporting on how they consider environmental factors in investment decisions.
Other countries are likely to follow suit. On a higher level, the EU is expected to encourage asset managers to consider environmental impact once it brings in its new standard.
The range of socially-conscious instruments is growing.
There’s considerable demand for them, as investors realise that the market might be morally neutral, but their actions within it aren’t.
They’re looking for investments that fit their values.
Scarcity and growing demand are bolstering the prices of green bonds, and that pattern shows no sign of changing.
Should You Invest?
Should the uncertainties around green bonds put you off investing in them?
No.
The uncertainties aren’t around their value.
They’re around how much good each bond does.
While that remains complex to judge, the odds of your investment doing some good for the environment increase immeasurably once you follow a green investing path.
These are bonds with stable returns that help make the world a better place, for you and others.
They help to ensure that we’ll still have a planet to enjoy once our investments pay off. And without that, what is any bond worth?
Paul Connolly
Paul Connolly has been a journalist for more than 20 years, as a reporter and editor for Argus Media, Reuters, The Times, Associated Newspapers and The Guardian. He has covered Islamic Finance for Reuters in the 1990s. Paul has since helped launch three newspapers, as well as reported from Tokyo, Los Angeles and Stockholm.
