These bonds make it easy to be ‘green’
This blog post is part of a year-long series that examines key concepts in our glossary of philanthropy services terms.Green bonds are tax-exempt standard bonds issued by federally qualified organizations (such as Bank of the West and BNP Paribas) or by municipalities for the development of “brownfield” sites. Brownfield sites are areas of land that are underutilized, have abandoned buildings, or have low levels of industrial pollution.
Investor demand for green bonds has surged in recent years – with $42 billion issued in 2015, almost four times the $11 billion issued in 2013, according to the Climate Bonds Initiative. A major turning point in the green bonds market occurred in November 2013, when the first corporate green bonds were issued. To put the magnitude of this issuance into perspective, consider that a year earlier in 2012 only $3 billion in green bonds were issued.
By September 2016, the value of green bonds issued was expected to be the most of any year yet at $50 billion, according to the Initiative.Myths vs. reality
MYTH: Green bonds always yield low return. That is false. In reality, they can have any size of return.
MYTH: Green bonds are all the same. Also false. There are in fact four different types of green bonds, according the Climate Bonds Initiative:
- Green “use of proceeds” bonds – Most of the green bonds issued are this type of asset-linked bonds. Proceeds from these bonds are earmarked for green projects but are backed by the issuer’s entire balance sheet.
- Green “use of proceeds” revenue bonds – The proceeds of these bonds are also earmarked for green products; however, unlike the latter category, revenue streams from the issuers through fees and taxes are the collateral for the debt.
- Green project bonds – Unlike the latter two categories, proceeds raised by the sale of these bonds are “ring-fenced” for a specific underlying green project or projects, and the only debt recourse is to the project(s)’ assets and balance sheet.
- Green securitized bonds — Proceeds raised by the sale of these bonds can be either earmarked for green projects or put directly into the underlying green projects. The debt recourse is to a group of projects that have been grouped together, as in a covered bond.
The reality is that the return on green bonds tends to be lower, when compared to the return on other bonds (although that is not always the case). Even so, many experts agree that making an investment in sustainability may be a smart move for individuals and families because it has the potential to yield poverty reduction, as well as gains in health, education, and infrastructure.
Investing in green bonds may also be a great way for families to bond across generations and make young adults feel connected to their families’ wealth and investment activities. (More than two-thirds of millennials feel that their investment decisions should express their social, political, or environmental values, according to a U.S. Trust Insights on Wealth and Worth study.)
Investing involves risk, including the possible loss of principal and fluctuation in value. The two main risks related to bond investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Investments in higher-yielding, lower-rated corporate bonds are subject to greater fluctuations in value and risk of loss of income and principal. This information is for educational purposes only and is not intended to be investment advice or a recommendation to buy or sell a specific investment.