April 9, 2017; Wall Street Journal
The methods for reducing your carbon footprint keeps expanding. The Wall Street Journal reports that “green bonds” are a growing market for investors. So far, it’s mostly institutional investors, but some funds are opening up making it easier for individuals to buy in. They represent one of a growing number of choices for socially conscious investors.
Green bonds are issued to fund projects that have positive environmental and/or climate benefits and offer tax benefits to buyers. The trend is “part of the overall trend of do-good investments becoming more popular,” says Gerrard Cowan, writing in the Wall Street Journal. There’s been a large jump in the number of “green bonds” as a mix of private and public organizations take advantage of investors’ growing interest.
“These are no longer niche investments,” says Neena Mishra, director of ETF research at Zacks Investment Research, quoted in the Wall Street Journal. A number of European funds focus on green bonds already and the U.S. lags in comparison. However, the U.S. market is growing quickly, moving from $3 billion in 2012, to $81 million last year, to an expected $150 billion in 2017.
According to a report prepared by the Climate Bonds Initiative, more than $694 billion in bonds labeled green or that are financing climate solutions have been issued in the U.S. However, the total is small when compared to the global bond market of $90 trillion.
The majority of issuers of green bonds are government agencies, including local governments, development banks, and state-owned entities. In the U.S., that means that the income from the bonds is tax-exempt for bondholders. The largest issuer in the world of such bonds is the China Railway Corporation, which is focused on expansion of high-speed rail.
Though green bonds come in many varieties, most often, the proceeds of the bond are earmarked for green projects and pay off investors like other bonds, often from revenue streams such as taxes or fees. That fits well with the role that bonds play in most investment or retirement portfolios: predictable income. They differ from another kind of less common bond that’s designed for social impact—social impact bonds, or pay-for-performance bonds, which are a contract with the public sector linked to improved social outcomes intended to result in public sector savings.
Those issuing the bonds self-label them green. Independent reviewers help give some structure or shared definition to the market, and there is also a set of voluntary principles used to help those issuing bonds and to help investors evaluate the impact of their investments.
The principles about labeling green bonds are not legal agreements and are therefore non-binding. Industry watchers admit there’s still work to be done in defining the field, what qualifies as a green bond, and how to build a market for the bonds so that buyers and sellers can reliably trade them. Geographical context is important, too: Something labeled “green” in China, for example, may not be seen as “green” by buyers in other nations.
Who can buy green bonds? Right now, institutional buyers mostly, though there are several U.S. individual shareholder funds like Calvert Investments, which launched its green bond fund (CGAFX) in 2013. Mirova Global Green Bond Fund launched this year along with the VanEck Vectors Green Bond ETF. The VanEck fund is structured as an index fund to reflect the trends in the larger green bond marketplace.
Given the demand, will there be enough good green projects and bonds? Investors are interested in buying securities that help make the world better, according to Suzanne Buchta, a managing director for green bonds at Bank of America Corp., the biggest underwriter of green bond sales globally quoted in Bloomberg. “There’s a growing pool of green investors that care,” she said. There is a growing acknowledgement that philanthropy, business, investing, and doing good are connected. How we invest and spend our money matters.
But, ultimately, bonds are debt with interest. They are paid for by taxes, tolls, and fees. Local citizens have to be ready to pay for those projects over the long term. There’s another catch, too: If Trump is successful in slashing tax rates at the high end, the value of tax-free bonds of any kinds declines, and that makes things more expensive for the municipalities that issue the bonds and less attractive to buyers.
In the U.S., about half the buyers of municipal bonds are individuals because they are frequently structured to give the buyers tax breaks. Bonds are particularly attractive to retired people or people about to retire, who seek predictable income. Financial advisors tell retirees that bonds are a critical part of a retirement portfolio.
With the coming surge of retiring baby boomers, is the green bond market about to take off? Could green bonds funding infrastructure projects that benefit local rivers, support climate initiatives, and other positive environmental benefits become a favorite with boomer investors and nudge the market toward more green projects? Might a growing interest by investors in green bonds provide many localities with the impetus to undertake their own infrastructure work without waiting for Congress?—Kevin Johnson