Abacus: Asset of the Week - Green Bonds

Do you care about climate change? Do you care about the environment? Do you like investing? Are you more interested in the long-term stable bond market than that crazy up-and-down nonsense equity market? Are you tired of the same old boring bonds?

Try “Green Bonds”! Assets which “tie the capital raised in bond issues to environmentally friendly investments,” The Economist explains. The theory behind Green Bonds is that you can contribute to a good cause while earning a little income on the side. Let’s discuss A) what they are, B) why they’re relevant to this week’s column, and C) your investment opportunities.

As I quoted before, Green Bonds tie the capital raised by bond investing to environmentally friendly issues. For example, Company XYZ issues $1.5 million in Green Bonds, attempting to raise capital to finance their innovations in wind-powered energy. Therefore, your buying of a Green Bond is not only an addition to your current portfolio, but it’s an addition that in which the money you put out is going towards investments that help the environment (as opposed to investing in the gambling sector or something). This is good, no?

In theory, this is a great idea. The Green Bond market, however, presents a few initial problems. First: Initially, the issuers of any bond self-declared that their bonds were “Green,” which obviously, as the market grew, became an ethics problem. To solve this issue, bonds became recognized as Green via an external reviewer, who could “sign off” on the bond in question. Generally, various international institutions act as certification agencies, who can review the bonds in place and officially acknowledge them as Green. For example, one of the largest providers of external review on the “Greenness” of bonds is the The Centre for International Climate and Environmental Research in Oslo, or CICERO, based in Norway.

Institutions usually accept bonds as Green within “certain broad rules.” Essentially, broad guidelines or principles that can provide a common, but interpretive, definition of bond Greenness. For example, "Over 140 of the world’s largest banks and asset managers have signed up to the Green Bond Principles,” which provides exactly this service. The problem with this model of external review is that different types of standards are increasing rapidly. Different countries, like China, have “drawn up its own standards for the Chinese market that differ from international ones.” Obviously, this can create a type of uncertainty in the uniformity of the international Green Bonds you look at; how can you know if you’re actually buying a bond supporting something that is worth investing (in the environmental sense, that is)?

Anyways, why are Green Bonds the “Asset of the Week”? Recently, on the 10th anniversary of the first Green Bond ever issued, the European Investment Back (EIC) issued the longest ever Green Bond, at a duration of 30 years. To add on to this, initially there was €500 million worth of these bonds issued, but the demand from “institutional investors” was so high that they doubled the issue to a total of 1 billion Euros. The point of this anecdote: both the supply and demand of Green Bonds are accelerating at a remarkable rate, and breaking records along the way.

The Climate Bonds Inititave expects that over $150 billion worth of Green Bonds will be issued this year, compared to only $3 billion issued in 2012. Last year, Apple issued a $1.5 billion bond, which earned them the title of the Biggest Ever Green Bond. This year, they “doubled down” and issued another $1 billion Green Bond, to fund renewable energy generation. Finally, “The Nordic Environment Finance Corporation (NEFCO) reports that its five member countries have signed a framework agreement allowing the institution to approve green growth investments outside Eastern Europe,” so more and more of these Green Bonds are going to issued and externally approved. This market is clearly expanding.

So, what are your investment opportunities? One initial problem is that these bonds are usually picked up by international investors in really large blocks. However, you can still ‘invest in a good cause’ via a trickle-down effect: You can invest in ETF’s and mutual funds that purchase (or even only purchase) Green Bonds. The real question is: Should you?

To start, the ETFs and funds that purchase Green Bonds tend to have narrow selection opportunities, reflecting the small market. It also follows, from the small market, that Green Bonds tend to be illiquid, meaning that you will probably have to hold these assets until maturity. And since these bonds are issued under voluntary, and proliferating, standards, there’s no way to confirm adherence to a certain standard like the Green Bonds Principle. Finally, don’t expect top-level yields: The S&P Green Bond Select Index had an annualized return of 8.54% over the last 5-years. On top of the lesser earned incomes, the fund’s usually charge higher fees for their added “troubles”.

The conclusion from all this: This investment opportunity really depends on how comfortable you are with lower yields, less liquidity, and higher fees. But, despite this, you are investing in something more ethical than, say, the gun or tobacco business. To you, investing in these may mean you’re helping earth while maintaining diversity in your portfolio, or whatever. In the end, I’m sure whatever company that is financing a new transit line to reduce emissions would love your support!