Global issuance of environmentally conscious “green” bonds has exploded in recent years—from roughly $10 billion in 20131 to $168 billion in 2018.2 Such bonds were created to fund projects with direct environmental benefits such as clean energy, low-carbon transportation and water-management systems. Unfortunately, they don’t all live up to the name.
Climate Bonds Initiative, a London-based nonprofit that certifies and tracks green bonds, has reportedly denied certification to hundreds of issuances that failed to meet its low-carbon requirements. In one case, an issuer was purportedly planning to use the proceeds of a green-bond issuance to finance upgrades to coal- and gas-power facilities.3
“It can be very difficult for individual investors to identify truly green bonds,” says Cooper Howard, director of fixed income and income planning at the Schwab Center for Financial Research. “Bond offering statements will sometimes say what the proceeds are being used for, but those documents can be cumbersome to wade through.”
That said, Cooper has two tips for investors interested in such bonds:
- Use a bond fund: Fund managers can shoulder some of the burden of ensuring that funds intended for green projects are being used as promised. However, a fund’s green bona fides won’t always be evident from its name, so investors may need to do some research to find a fund that matches their goals. Also be aware that some green-bond funds might include a portion of bonds from nongreen projects to round out their holdings.
- Check reputable sources: The Climate Bonds Initiative, for example, maintains a list of certified green bonds at climatebonds.net. Schwab also includes green-bond funds on its quarterly Socially Conscious Funds List.
The yields on green bonds and green-bond funds are often only slightly less than those paid by their nongreen counterparts. “Our research shows that you may take a bit of a haircut on yield,” Cooper says, “but many investors see it as a fair trade-off for knowing their money is being used to finance projects that align with their values.”
Investors looking for other ways to make a social impact with their investing might also consider municipal bonds. “Not all bonds issued by state and local governments are focused on the environment,” Cooper says, “but some offer another way to invest in projects that can have a positive social benefit.”
1Bonds and Climate Change: The State of the Market 2018, climatebonds.net, 09/2018. | 2Green Bonds: The State of the Market 2018, climatebonds.net, 2019. | 3Mike Bird and Manju Dalal, “Environmentally Unfriendly Deals Highlight Gray Areas for ‘Green Bonds,’” wsj.com, 08/19/2018.