Learn About Green Bonds

Dollar sign inside of light bulb connected to wind farm
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Green bonds are a relatively new segment of the bond market, but one that investors are sure to hear more about in the years ahead. A green bond is a bond whose proceeds are used to fund environment-friendly projects. 

An Overview of Green Bonds

Green bond examples include projects related to clean water, renewable energy, energy efficiency, river/habitat restoration, acquisition of land, or mitigation of climate change impacts. Many bond funds invest a portion of their capital to such causes, but green bond funds are those specifically invested in environmental initiatives. Green bonds typically carry the same credit rating as the issuers’ other debt obligations.​

The Benefits

Green bonds provide investors with a way to earn tax-exempt income and gain the satisfaction of knowing the proceeds of their investment will be used in a positive manner. Issuers also benefit, since the green angle can help attract a new subset of investors—and higher demand, in turn, equates to lower borrowing costs. Institutionalinvestor.com reports that there was $35.8 billion worth of green bonds outstanding as of September 2014, with issuance growing rapidly throughout 2014 vs. the levels of 2013.

This growth continued through 2015 when green bond issues exceeded $41 billion. 

The First Issuer of Green Bonds

The first entity to issue such bonds was the World Bank, which began the practice in 2008 and has since issued over $3.5 billion in debt designated for issues related to climate change. Ginnie Mae and Fannie Mae have also issued mortgage-backed securities with the “green” label, as has the European Investment Bank. U.S. municipalities have been issuing bonds for the specific purpose of funding environmental projects for several years, although usually not with an easily-identifiable green designation.

Still, $1.7 billion worth of bonds were issued within this category during the first half of 2013.

The First U.S. Green Bond

The first U.S. entity to use this specific term was the Commonwealth of Massachusetts, which in June 2013 sold $100 million of 20-year notes it referred to as “green bonds.” The Commonwealth intends to disclose exactly what projects have been funded with the bonds, providing socially-conscious investors with the means to track how the money is being put to work.

This is an important consideration since the specifics of what constitutes a “green” investment is obviously open to interpretation. The issuance proved popular among both individuals and institutions that are compelled, by charter, to dedicate a portion of their cash to green investments. The success of the Massachusetts issue is likely to prompt other states and municipalities to follow suit in the months and years ahead.

Generally speaking, it's reasonable to expect that green bonds will deliver longer-term returns in line with government issues given that their cash flows generally come from projects with government sponsorship. In the short term, however, performance may be somewhat lower than government debt due to the lower liquidity of green bonds.

Can Individual Investors Buy Green Bond Funds?

On October 31, 2013, Calvert Investments launched the Calvert Green Bond Fund, which trades under the ticker CGAFX. A full description of the fund is available here. Keep in mind, however, that this is a new fund employing an untested strategy, so it may pay to give the fund some time to develop a track record.

Investors also can choose broader socially-responsible funds. There aren’t many bond funds available in this arena so far, as stock funds make up the bulk of the ESG (environmental, social and governance) universe. Nevertheless, some of the current choices include TIAA-CREF Social Choice Bond Fund (TSBIX), Domini Social Bond Fund (DFBSX), Parnassus Fixed-Income Fund (PRFIX), CSIF Bond Portfolio A (CSIBX) Praxis Intermediate Income Fund (MIIAX), and for those looking for a riskier option, Pax World High Yield Bond Fund (PXHAX).

Recent Additions to Green Bond Funds

In 2015, two of Europe's largest insurers, Allianz SE and Axa SA, initiated green bond funds, as did State Street Corporation. In 2016, industry news sources reported that Blackrock

By 2016, industry news sources reported that Blackrock, by far the world's largest asset manager, was preparing to enter the green bond fund field. An ironic result of this explosion of interest is that in 2016 an emerging problem for fund managers is a growing shortage of green debt to buy.