How Green Bonds Are a Cornerstone of Responsible Investing

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A green bond is a bond whose proceeds are used to fund projects that promote sustainability. Interest in new types of bonds is rising because people can help influence change through investing. First issued in 2008 by the World Bank, green bonds have caught on worldwide. In 2019, there was $254 billion in green bonds issued; 2020 saw over $312 billion issued; from January to March 2021, the world raised $107 billion using green bonds.

Analysts believe the number of green bonds is going to keep climbing. If the trend keeps going, there will be trillions of dollars of green bonds on the market within a few more years. Learn more about green bonds and how they are being used to create positive climate action worldwide.

Key Takeaways

  • Green bonds provide a way to help environmental causes through investing.
  • The World Bank issued the first green bond in 2008.
  • Massachusetts became the first in the U.S. to issue a green bond in 2013.
  • Buying a green bond might be too costly for retail investors, but there are green bond funds that make it easy to invest in baskets of green bonds.

Why Invest in Green Bonds?

Green bonds provide you with a way to earn income that is exempt from taxes; you'll also know that the money you lend to a corporation is being used in a way that is not harmful. Companies that use green bonds for funding also benefit. The green angle attracts a growing number of people who are more aware of and want to act to help fight climate change.

Higher demand for green bonds equals lower costs to borrow money. Lower costs mean reduced spending for a business. These savings are either passed down to you in the form of a dividend or used to lower the costs for funds.

Green Bonds Help Environmentally Friendly Projects

Green bonds are meant to reduce climate impact by using some or all of the money raised on projects that relate to clean water and renewable and efficient energy. Some issuers also use the money to help restore water habitats and biomes and to take steps to reduce carbon output.

Many bond funds invest a portion of their money to these causes, but green bond funds are made up of bonds issued only for green projects. These bonds tend to carry the same credit rating as other debts issued by the same firm.​

The World Bank and the Green Bond Program

The World Bank was the first to use a green bond for funding, which started the practice in 2008. In 2019, it raised over $13 billion in funding for bonds related to climate change. In the years since it started green bonds, the World Bank's program has given more than $30 billion to programs for renewable energy, transportation, forests, and disaster risk management in cities worldwide.

U.S. cities have been issuing bonds for the specific purpose of funding environmental projects for several years. However, they don't always make it easy to identify their debt as green.

Ginnie Mae and Fannie Mae have also sold mortgage-backed securities with the green label, as has the European Investment Bank.

Massachusetts Clean Water Trust

The state of Massachusetts issued the first green security in the U.S. In June 2013, it sold $100 million worth of 20-year notes it called “green bonds.” The state discloses the projects that have been funded with the bonds, providing socially conscious investors with the means to track how the money is being put to work.

Since 2015, the Commonwealth of Massachusetts Clean Water Trust has raised hundreds of millions to fund wastewater and drinking water infrastructure projects through the state's green bonds.

These bonds proved popular among both people and institutions whose charters state they must allot a portion of their cash to green assets. The success in Massachusetts prompted other states and cities to follow suit.

What Makes a Green Bond Green?

How a green investment becomes green is somewhat open to interpretation. The definition is slowly becoming more clear as more bonds are issued and the market grows.

In general, green bonds should deliver long-term returns in line with government issues. This is usually because their cash flows come from projects with government sponsorship. In the short term, returns and yield may be somewhat lower than government debt because they are not as liquid as other assets.

As more green bonds (or climate bonds, as some call them) are issued, the market will become more liquid and the definition more solid.

Can You Buy Green Bond Funds?

As the market expands, the types of green bonds will grow with it. There is already a substantial number of individual bonds and ETFs, and this development is likely to run parallel with the growth in renewable investments.

You can also choose from a broad market of socially responsible funds. There aren’t many bond funds in the environmental, social, and governance (ESG) market, as stock funds make up the bulk of this segment.

Some of the current fund choices, including bond ETFs, are:

  • TIAA-Core Impact Bond Fund (TSBIX)
  • Domini Social Bond Fund (DFBSX)
  • Parnassus Fixed-Income Fund (PRFIX)
  • Calvert Bond Fund A (CSIBX)
  • Praxis Intermediate Income Fund (MIIAX)
  • Pax World High Yield Bond Fund (PXHAX)—a global fund
  • iShares Global Green Bond ETF (BGRN)
  • VanEck Vectors Green Bond ETF (GRNB)

Developments in Green Bond Funds

In 2015, two of Europe's largest insurers, Allianz SE and Axa SA, issued green bond funds, as did State Street Corporation.

By 2016, news sources reported that Blackrock, the world's largest asset manager, was preparing to enter the green bond fund market. An ironic result of this entry into the green market is that in 2016 fund managers began having trouble finding green debt to buy.

Blackrock's gamble paid off; it found success with the iShares Green Bond Index Fund (IE). It has had a few issues since March 2017. It's benchmark, the BBG Barc Global Green Bond 100% EUR Hedged Index, out-performed it for the first few years. However, IE passed the benchmark in 2020.

The practice of using green bonds to raise funds for non-green purposes is called greenwashing. Be cautious when you're looking into bonds and funds to make sure the intent of the bond is genuine.

In 2019, HSBC Global Asset Management launched a green bond fund for emerging markets, sending more signals that green investments and investor concern for the environment should not be taken lightly.

In May 2021, Amazon issued a $1 billion green bond to use the funds to decrease carbon output and use electric vehicles. It plans to power operations with 100% renewable energy, support affordable housing, and train 100,000 employees in medicine and technology.

China has pledged to be carbon-free by 2060. As the largest carbon producer globally, it will need a lot of green capital to reach its goals. Analysts expect a high amount of green debt to be issued from China in the next few decades.

Green bonds may not yield the highest returns, but not all profit is quantifiable. Green bonds give you the option to have a portfolio with income and a chance to invest responsibly at the same time.