Fixed returns to fix the world? An introduction to green bonds https://moxiefuture.com/wp-content/uploads/2018/04/moxie-future-pathway_julien-lux-55585-1024x576.jpg 1024 576 Moxie Future Moxie Future https://moxiefuture.com/wp-content/uploads/2018/04/moxie-future-pathway_julien-lux-55585-1024x576.jpg 26 Apr 2018 24 Feb 2026

Fixed returns to fix the world? An introduction to green bonds

26 Apr 2018

Having decided you want to invest in a more environmentally and socially responsible way – a way that is truly aligned with your personal values – do you find yourself struggling to find the kind of investment vehicles that fit your needs?

Recently we’ve seen quite a lot of movement on socially responsible equity funds – funds which hold securities in companies that adhere to social, environmental beliefs or even religious beliefs. If you want to learn more about these, we suggest checking out Morningstar as a good place to start, they offer various screening tools and fund listings.

But what are the other options on the table? If you are wanting to maintain a balanced and diversified portfolio, you may also be thinking about including other types of investments in there – investments, for example, like bonds.

What does this mean for you as a responsible investor? How can you get bonds into your investments and still make sure you are hitting you sustainable investment priorities?

A bond is a fixed income investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate. Bonds are used by companies, municipalities, states and sovereign governments to raise money and finance a variety of projects and activities. Owners of bonds are debtholders, or creditors, of the issuer. Investopedia

We’ve got good news for you! The booming green bond market is happening, and it’s happening NOW. A fairly young market – the first green bond was only issued in 2007 – it has since seen growth of 80% a year over the past five years (BusinessGreen). The green bond market is now a whopping size of US$220bn (as of the end of 2017) and this phenomenal growth is set to continue. 2018 is already off to a good start and with many big green finance events in the pipeline, it is hoped to reach the US$1tn by 2020 milestone (Bonds and Climate Change – The state of the Market 2017).

The green bond market is now a whopping size of US$220bn (as of the end of 2017) and this phenomenal growth is set to continue.

So what is a green bond? Definitional stuff

A green bond is the same as any other bond, except for one important difference – money raised from a green bond will be used exclusively to finance green projects, projects and activities with a clear environmental benefit.

So, in its simplest form, a bond issuer (e.g. a corporate or a government entity) will raise a fixed amount of capital to fund a range of environmental projects. The issuer will then repay the capital (known as the principal) and accrued interest (known as the coupon) over a set period of time. It’s a fixed income investment so you know what you are getting.

The big question is, how do you know that the capital is being used for environmental projects? To qualify for the ‘green’ label, the bond must undergo third-party verification or certification to establish that the proceeds are funding projects that genuinely do generate environmental benefits. If you want to learn more about these standards, check out the work of the Climate Bond Standard Board which has established a procedure for certification, including nominating third parties who are able to provide the verification.

Why does all of this matter?

There are many compelling reasons to get involved in the green bond market – not least that the growth in green bond issuance will play an important role in reaching the UN Sustainable Development Goals (read more at UN’s Sustainable Development). The impact of green bonds varies and depends on the quality and performance of the underlying projects that are financed by the proceeds so do some research to ensure this is aligned with your priorities.

Getting involved … what can you do?

The progress of the green bond market is undeniable – and it really is something worth considering as you make your investment decision. To get stuck in, you may want to consider green bond funds or ETFs as a way to get a diversified portfolio. The good news is that there are already a fair number of funds and ETFs out there so, before moving forward, ask you financial advisor for some good options and alternatives. While it’s also possible to buy individual green bonds, these can be challenging because many bonds have relatively high minimum investments and it is very time consuming to do the research on your own.

And with any financial and investment decision, make sure you do your research so you really understand what you are getting yourself into. If you want to read more about the green bond market we recommend visiting Climate Bonds Initiative, a very comprehensive site with a lot of useful information. Another useful source is the World Bank, one of the biggest issuers of green bonds. For a comprehensive understanding of how the green bond market works, take a look at Deutsche Bank’s Green Bonds flowchart.

If you have any questions or comments on this article we would love to hear from you.

Here are some examples of recent green bonds, to give you an idea on where they are coming from, their size and what the capital is used toward

Example 1

Republic of Indonesia
Issue date: 01-Mar-2018
Amount issued: SGD1.65bn
Yield at issuance: 3.75%
Rating: BBB (Fitch), Baa3 (Moody’s), BBB- (S&P)

Comment: This was the first green bond from Indonesia, first sovereign green bond from Asia and fifth globally. The proceeds will be used to fund a wide variety of projects including renewable energy, energy efficiency, low carbon transport, green buildings and sustainable agriculture. Ministries and agencies in Indonesia can apply for funding.

Example 2

Apple
Issue date: 17-Feb-2016
Amount issued: USD1.5bn
Yield at issuance: 2.85%
Rating: Aa1 (Moody’s)

Comment: This was one of the largest green bonds issued to date. Projects funded by the bond include green buildings, renewable energy sources to power data centers, and robotic technology to disassemble used iPhones and preserve high-quality components. This project estimates that it can reduce CO2 with 439’100 metric tons. This saving is equivalent to more than 94’000 passenger vehicles driven for a year or 47’000 homes’ energy use for a year.

Example 3

Beijing Capital Group
Issue date: 26-Mar-2018
Amount issued: USD500m, CNY630m
Yield at issuance: n/a
Rating: BB- (S&P), BBB (Moody’s)

Comment: Beijing Capital Group Co Ltd is a state-owned Chinese enterprise engaging in environmental protection, infrastructure, real estate and financial services both domestically and abroad. This is the first offshore green bond issued by a Chinese corporate that is denominated in two currencies. Proceeds will finance water & waste management, air pollution control, low carbon transport, sustainable agriculture and green buildings with minimum certification thresholds of LEED Gold, Silver BREAAM Plus, China Green Building Standard and other equivalent labels.