Fight Climate Change, And Protect Our Planet, By Investing In Green & Impact Bonds
By Jennifer Tonda, Seeking Alpha
Contrary to Popular Belief, Investors Don’t Have to Give Up Yield When Investing in Green and Impact Bonds.
At a time of unprecedented governmental, corporate, and media focus on energy efficiency and solutions to mitigate climate change, interest in impact investing products has soared. On the fixed-income side, there is a growing variety of green and impact bonds, exchange-traded funds (OTC:ETFS), and mutual funds that investors can utilize to meet their investment goals while also supporting companies and government initiatives aimed at developing cleaner energy and other socially responsible objectives.
The fixed-income universe includes many different types of green and impact products—including some that investors may not be aware of, or fully understand. Furthermore, several key misconceptions about green and impact bonds continue to float around the marketplace, which can prevent investors from taking full advantage of these potential investment opportunities.
Below is a listing of the major categories of impact-oriented bonds currently available in the market:
Green Bonds, which use proceeds to fund environmentally friendly projects.
Impact Bonds, which invest in businesses producing a social benefit (including low-income housing).
Sustainable Bonds, which use proceeds to fund environmental and social projects.
SRI (Socially Responsible Investments), which use screens to exclude certain companies, such as tobacco, firearm, and gaming corporations.
Blue Bonds, which use proceeds to finance marine and ocean projects producing positive environmental, economic, and climate benefits.
One of the common misperceptions about green and impact bonds is that they are difficult to diversify, but the above partial list of products shows that exposure to them can increase diversification. Investors can also choose from many different types of green/impact bonds, including municipal bonds, corporate bonds, mortgage bonds, and agency HUD (housing and urban development) bonds. Corporations across many different industries such as Apple, Starbucks, Toyota, Duke Energy, Kilroy Reality, Sysco Corp., and Verizon have issued green bonds, as well as companies in emerging markets such as large Brazilian paper producer Suzano Papel.
A green/impact fixed-income portfolio can include any combination of these bonds—with purchases of any size, even a minimum of $1,000 in some cases. Furthermore, many investors assume that they would give up yield when they invest in green and impact bonds, which is not the case. For example, Apple has a 7-year green bond (AAPL 3.00 3/27), and it is currently yielding 1.75% (+115/10-year), which is the same as Apple’s non-green seven-year bond (AAPL 3.00 11/27), also yielding approximately1.75%.
Helping Investors Find the Right Bonds (and Create the Right Portfolios)
Fortunately for investors and the financial advisors they rely upon, modern technology solutions available in today’s marketplace can simplify the search for green and impact bonds across the municipal, corporate, mortgage, and agency universes—and build portfolios with bonds that fit their investment objectives.
For example, digital fixed incomed marketplaces can enable users to search for green and impact bonds, and build portfolios, as part of a streamlined and thorough search. Investors should look for cloud-native fixed-income platforms that can apply negative screens for tobacco and oil/gas companies, and also add criteria such as pollution control, land preservation, or higher education. Even if a municipal bond isn’t technically classified as a green bond, it could still be suitable for an investor if it funds something beneficial for the environment, such as clean water projects.
This approach to investment selection gives investors greater control over their portfolio than they would have if they invested in a fixed-income mutual fund or ETF. One problem with impact investing is that every investor has a different definition of what they feel is “impactful.” With a mutual fund or ETF, whatever the asset manager has in the portfolio is what you get. And in some cases, even if a bond is well-priced and is classified as green, it still may not suit an investor’s preferences. For example, if an investor wishes to avoid investing in the energy sector, they could be stuck with a green energy bond in a mutual fund or ETF.
In 2019, total green bond and loan issuance around the world reached a record high of $254.9 billion—49% higher than issuance in 2018, according to Climate Bonds Initiative data. For 2020 (when we celebrate the 50th annual Earth Day), Climate Bonds Initiative expects total green bond and loan issuance to grow to between $350 billion and $400 billion. As more green bonds are issued, and investor demand for green and impact bonds continues to increase, investors and the advisors they work with can effectively navigate this rapidly growing area of the fixed-income universe with a combination of cutting-edge technology and human expertise.