If you want to invest in the bond market in a socially responsible way, green bonds may be the way to go.
These tax-exempt bonds are issued by federally qualified organizations and/or municipalities for the development of brownfield sites, and they are growing in popularity. The amount invested in this market more than tripled from $11 billion in 2013 to $36 billion in 2014 – not surprising given the propensity for many investors to want to do the right thing while also making money; with green bonds, they can do this with a tax-exempt security.
The World Bank and the International Finance Corporation have been at the forefront of green bond issuance.
Since 2008, The World Bank has issued $8.5 billion in green bonds in 18 currencies, including a 10-year $600 million benchmark green bond and green growth bonds. All bonds issued by The World Bank are rated AAA/Aaa, which means investors will not have to worry about default.
Green bonds issued by The World Bank are dedicated to climate-mitigation, adaption projects, and environmentally friendly activities, including but not limited to:
- Renewable energy
- Energy efficiency
- Sustainable transportation
- Low-carbon projects
- Financing for watershed management
- Infrastructure to prevent climate-related flood damage
- Rooftop photovoltaic systems on schools in China
- Sustainable urban transportation in India
- Geothermal development in Indonesia
- Energy efficiency improvements in China (The World Bank has a green-funded project to cut greenhouse gas emissions by 4 million tons per year.)
- Sustainable forest management in Mexico
- Disaster risk management in the Dominican Republic
The IFC and Green Bonds
The IFC has been big in the green bond market since 2008, having issued $5.1 billion in green bonds according to the most recent 2017 data.
The organization issues a variety of green bonds in 11 currencies, but two themes are particularly noteworthy:
- The IFC issues green bonds in Mexico to help the growth of solar power facilities, which has created jobs and reduced dependence on diesel generators while servicing 164,000 people.
- The IFC issues green bonds that help companies recycle e-waste that is not only harmful to the environment, but people as well.
What’s the Upside?
The overall bond market is massive at more than $100 trillion, as of 2017, and it’s likely that the green bond market will slowly but surely increase its share of that. The recent rise in oil prices could help add to the enthusiasm for green energy. Overall, green energy has a high likelihood of success over the long haul.
Government agencies and municipalities have led the way, and now utilities are getting into the game.
Retail Investor Access
If you want easy access to green bonds, consider the Calvert Green Bond A Fund (CGAFX), which has 65% of its net assets tied to investment-grade denominated debt securities and 25% of net assets in foreign debt securities. CGAFX is up 1% year-to-date, but investors don’t jump into bonds for capital appreciation. It’s all about the yield, which is currently 1.73% as of May 2017. The expense ratio is 0.88%, which is above the category average of 0.84%. (For more, see: Go Green with Socially Responsible Investing.)
The bond rating breakdown as a percentage of CGAFX’s net assets ($30.61 million) is:
- AAA: 41.76%
- AA: 7.21%
- A: 12.94%
- BBB: 24.80%
- BB: 5.54%
- B: 1.95%
- Other: 5.80%
The minimum investment for CGAFX is $2,000 ($1,000 in an individual retirement account).
The Bottom Line
There may be challenges along the way, but the green bond market is led by significant players and should continue to grow. Along with that growth will come more opportunities for retail investors. (For related reading, see: Can Business Evolve in a Green World?)
Dan Moskowitz does not have any positions in CGAFX.