Yahoo Finanzen What Investors Should Know About Green Bonds
Socially responsible investing is growing in popularity, but most investors have only been able to buy stocks, equity-based mutual funds or exchange-traded funds.
For the most part, bonds weren't available until recently. That's changing, though. While it's still a very small piece of the debt market, "green" bonds are growing in popularity with investors who can now build their portfolio and their peace of mind.
Green bonds can back many different projects or uses, but the proceeds need to be for an environmental or sustainability project. Examples include renewable-energy infrastructure, creating energy-efficient housing, municipal bonds or backing green transportation.
The green bond market started roughly around 2007 when the World Bank and the European Investment Bank issued AAA investment-grade issuance from multilateral institutions, according to the Climate Bond Initiative, an international nonprofit organization focused on the green bond market. That year, about $860 billion was issued.
By 2013, the green bond market expanded when EDF, Bank of America and Vasakronan issued the first corporate green bonds. Since then, the market has expanded to include asset-backed, municipal and even high-yield bonds.
Canon Hickman, wealth manager at Equity Concepts, in Henrico, Virginia, says there are a lot of good reasons to seek out green bond investments. "You have that sense of accomplishment from the investment perspective. [People are] excited about what their money is doing in the world, and more importantly from the investment perspective, the projects are doing good and helping the environment while generating a return," he says.
Growth in the market comes from investor demand, not because of special incentives for the issuer. "From the issuer perspective, there's no premium for green bonds, no tax benefits per se, and it costs more for the issue to adhere to the voluntary guidelines," he says.
What green bonds do is help set the issuers apart from others in the bond market. "The issuers and companies want to identify themselves as proponents of the cause. ... It helps them stand out and be unique. From a marketing standpoint, it's a technique to help describe exactly what they're doing and the investors they're trying to court," Hickman says.
The market remains small. The Climate Bond Initiative says bond issuance is up to $31.4 billion this year, versus $36.59 billion issued in 2014. In more than two years since the first corporate green bonds were issued, there has been about $79 billion in issuance, according to the Climate Bond Initiative.
That may seem like a lot, but it really isn't -- in comparison, there were about $100 billion in traditional bonds issued each month in the same period in the corporate space.
"Even though there has been exponential growth in the green bond market, it is dwarfed by the amount of corporate issuance in the U.S. in the last two-and-one-half years," says Vishal Khanduja, vice president, portfolio manager and head of taxable fixed income at Calvert Investment Management, based in Bethesda, Maryland.
The small size of the market makes investing limited, Hickman says. "It's just a tiny speck in the overall market, which is the real concern from my perspective. The space is changing a lot, though, but [there's] not something around for everyone yet."
And for portfolio managers, it means adding other investments, such as U.S. government debt, into a fund.
"If you want to have a diversified portfolio, it's only going to be able to be a portion of your portfolio. There aren't enough issues outstanding," says Benjamin Bailey, fixed-income investment manager at Everence Financial, an adviser to Praxis Mutual Funds, based in Goshen, Indiana.
Khanduja says Calvert waited several years to launch its Green Bond Fund (CGAFX) to see if there was enough issuance to create a green bond mutual fund. Its fund has been active for about a year and a half.
The green bond market is facing the same strains as the regular bond market, such as lower issuance than anticipated and worries about the Federal Reserve raising interest rates. The Climate Bond Initiative predicted issuance of $100 billion in 2015. It's unlikely to reach that level.
If the Fed does raise rates, issuance may be constrained, Khanduja says, but it would be in proportion to what the whole bond market experiences.
Buying bonds. Despite some hiccups this year, demand for these products is increasing, which could lead to more issuance and more ways to buy green bonds. Like other types of bonds, the best way to access them is via a mutual fund or ETF, because only institutions can usually buy these.
Funds that already use socially responsible factors when choosing bonds will have already verified that the green bond issuance is real and not just "green washing" -- that is, making a product sound environmentally friendly when it isn't.
Examples of other mutual fund firms that offer green bonds or those with a socially responsible bent are TIAA-CREF's Social Choice Bond Fund (TSBRX). While not a pure bond fund, Green Century's Balanced Fund (GCBLX) holds a mix of stocks and bonds, with 15 percent green bonds.
One exception to going the mutual fund/ETF route is impact notes. Last year the International Finance Corp., a member of the World Bank Group, started issuing impact notes, which are five-year notes starting at $1,000 and available via broker-dealers.
The green bond space is still in its infancy, but more and different issuers are coming to the market, such as Toyota Motor Corp.'s (TOY) green bond to underwrite hybrid car loans.
"That was one of the first asset-backed bonds. That was an interesting deal. It opened up a new space for this kind of financing in the asset-backed area," says Del King, who is also a fixed-income investment manager at Everence and, along with Bailey, manages the Praxis Intermediate Income Fund (MIIIX).
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