What are green bonds and how can you invest in them?
Globally, green bonds are used to finance sustainable projects. You can invest in green bond funds even if you are unable to directly purchase green bonds.
Similar to its cousins in sustainable funds, green bonds are more well-liked than ever. Green bonds are coming in as the solution to both issues as investors hunt for new ways to green up their portfolios and businesses look to finance more green initiatives.
Definition of a green bond
An investment in fixed income known as a "green bond" is used to fund green and sustainable projects. Governments, nonprofit groups, and private businesses can all issue green bonds. These bonds can support recycling initiatives, clean transportation, sustainable forestry, and renewable energy (including wind, solar, and hydro).
How to invest and how green bonds operate
A business or the government may issue green bonds in order to raise money for a green project. Bonds are purchased by investors, who are then repaid with interest over time by the issuer or the government. Green bonds are typically sold to larger organizations like pension funds that can buy bonds in bulk; however, these are not frequently the investors.
Exchange-traded funds and mutual funds that provide green bonds, including the iShares Global Green Bond ETF and the Calvert Green Bond Fund, are available to individual investors. You can indirectly access green bonds if you decide to invest in one of those funds. Individual investors frequently cannot access green bonds directly; only institutional investors may.
Green Bond Fundamentals
In order to give investors insight into the sustainability of their investments, a group of investment banks created the "Green Bond Principles" in 2014. The rules are as follows:
1. Use of Proceeds: This governs how bond funds can be spent and outlines eligible green projects, such as renewable energy production and transmission, energy efficiency in buildings, pollution prevention, and sustainable land management.
2. Process for Project Evaluation and Selection: This explains what the green bond issuer should communicate to investors, such as the project’s objectives.
3. Management of Proceeds: This indicates how the funds generated by the bond should be handled.
4. Reporting: This explains how the green bond’s progress and impact should be recorded. Ideally, issuers will release an impact report with relevant details.
Why invest in green bonds
Green bonds can help investors put their money where their values are. Much like investing in environmental, social, and governance, or ESG, investments, green bonds have a mission built into the investment itself.
Green bonds can also have tax incentives in the form of tax exemption and tax credits. This way, issuers may not have to pay interest on their issuances and investors may not have to pay income tax on the interest they earn.
Green bond examples
According to research from the Climate Bonds Initiative, green bond issuance amounted to $297 billion in 2020 — up more than 246% from 2016. These green bonds have funded everything from wind farms to electric car projects. Here are a few examples of what green bonds have helped finance:
- Walmart closed its first green bond in September 2021, announcing that it will allocate an amount equal to its net proceeds from the $2 billion offer to projects such as making its facilities more energy efficient, waste recycling, and water conservation.
- Apple funded 17 green bond projects in 2020. Those projects will help prevent 921,000 metric tons of carbon emissions from being released every year. The projects also included a solar power development outside Fredericksburg, Virginia, that delivers energy to the grid, and a wind farm near Chicago that covers Apple’s electricity use in that region.
- Volkswagen issued a green bond in September 2020 that will help fund electric car manufacturing and e-charging station infrastructure.
Green bonds vs. blue bonds
While green bonds are used to fund a variety of environmental projects, blue bonds specifically fund water-related projects. Blue bonds have raised money for wastewater treatment and removing plastic waste in ocean water. Blue bonds, like their verdant cousins, are not likely to be available to the average investor.
If you’re looking for ways to invest green (or blue), you may want to consider ESG funds. You’ll likely be able to find a fund that matches your particular values — and many ESG funds have a low entry cost.