In the bond investment biosphere, the word “green” conjures images of raking in the dough. But for those intent on turning over the soil as well as turning a profit, or profiting the environment at large, green bonds have literally grown into an investment of choice.
“Many types of green projects have been financed by green bonds,” says Christopher Wigley, senior fixed-income portfolio manager at Mirova, and based in Paris, France. Wigley knows a thing or two about this, as he manages the Mirova Global Green Bond Fund (ticker: MGGYX).
In a nutshell — one from a very healthy tree, if you like — green bonds are fixed-income securities issued as either taxable or tax-exempt investments. Think of them as a vehicle to put your money where your heart is, backing the projects that build the environment and personal wealth at the same time.
“Renewable energy, energy efficiency, green transportation and water sustainability are perhaps the largest,” Wigley says. “But other project types include biodiversity, land sustainability, waste management, sustainable forestry and sustainable agriculture.”
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“For the issuer, green bonds are a great way to signal to a certain class of investors that environmental issues are paramount to their business,” says Kyle J. Putnam, an assistant professor of finance at Linfield College in McMinnville, Oregon.
“The feel-good factor is the primary benefit to investors considering green bonds,” adds Keith Richard, a Houston-based managing director and head of the Texas region for Siebert Cisneros Shank and Co. Just as some investors go the opposite way in dumping gun or tobacco stocks, “an investor who chooses to purchase green bonds acts primarily on principle, using their wallet to make an impact.”
Now, this all raises an inevitable issue: “whether investors, institutional or otherwise, would accept lower returns in exchange for allocating their dollars toward investments with strong social values,” Putnam says. “But evidence surrounding green bonds seems to show that the former does not have to be sacrificed for the latter.”
The important thing to remember is a green bond is just like any other bond from an investment standpoint, says Amy Hauter, an associate portfolio manager at Brown Advisory, based in Baltimore.
Hauter adds that Brown owns them in its Brown Advisory Sustainable Bond Fund ( BASBX).
“We expect them to produce similar yields, similar credit ratings and similar returns” as standard bonds, she says. “The advantage comes from their impact — they fund projects that lead to measurable results: X gallons of water saved, or X tons of emissions eliminated. So we see them as a no-brainer: competitive returns plus additional impact.”
“The appeal is clear: returns comparable to traditional bonds with like terms, and direct impact,” says Andrew Wetzel, senior vice president and portfolio manager with F.L.Putnam Investment Management Company in Wellesley, Massachusetts. “Green bonds are seeing tremendous growth, with Bloomberg New Energy Finance estimating market growth of 67 percent in 2017 over 2016.”
And yet, the non-ironclad rules that define green bonds could get bent in dubious ways. For example: Could an investment in a more efficient landfill system be classified as “green” in any way?
“The standards for what constitutes a green project are not uniform,” says Paul Casowitz, principal at New York City-based Sive, Paget & Riesel, an environmental law firm. “As an example, China has classified clean coal projects as green projects. Investors interested in furthering specific environmental objectives need to carefully evaluate the projects they’re funding.”
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External reviews assess how green bonds contribute to the overall sustainability strategy of a company, says Trisha Taneja, product manager at Sustainalytics and based in Toronto.
“Leveraging external reviews, investors can better understand how a company is using green financing to transition its business model toward a low-carbon economy,” she says.
And some investment firms adopt their own guidelines for issuers. JPMorgan Chase & Co. ( JPM) co-authored a set of “Green Bond Principles” in 2014, says Marilyn Ceci, the company’s head of green bonds.
“They recommend transparency and disclosure to provide investors with the information necessary to determine the level of environmental ambition and sustainability goals of the issuer,” Ceci says. “Investors make their own determinations about the greenness of the bond they’re purchasing.”
Yet investors might want to pause if they consider their green investment a global game changer. For now, green bonds make their mark one project at a time, experts say.
“At the project level these bonds are making a difference, however the market is still relatively small,” says Anthony Trzcinka, portfolio manager of the Pax Core Bond Fund ( PXBIX) and the Pax Balanced Fund ( PAXIX) for Impax Asset Management.
He points out that total green bond issuance hit $156 billion in 2017: a record, but still a trifle compared to the $1.3 trillion put into investment-grade corporate bonds. “In my opinion, the market would need to be bigger to make a difference on a larger scale.”
Still in the final analysis, making the green bond investment might prove less risky than the alternative.
“In my mind, these are investments that must be made to have any shot at keeping the Earth from warming beyond 2 degrees Celsius,” says Eric Glass, a portfolio manager at AllianceBernstein and located in the New York City area. That outcome, he says, would throw “global biodiversity, migration patterns, water availability — and the economy — into disarray.”
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“These assets have fairly long useful lives of 30 to 50 years and must be made over the next 10 years,” Glass says. “This is not feel good. This is smart, sustainable investing.”
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How to Grow a Portfolio With Green Bonds originally appeared on usnews.com
