Green bonds

Growing demand for green bonds due to climate fears

The United Nations 6th assessment report released last week said The Earth is on track to become 1.5 degrees hotter in the next decade. As residents, we should be prepared for more fires, floods, droughts, storms and animal extinctions. 

On that note, climate change has some powerful impacts on the financial market as well. It’s making investors reassess their portfolio and consider the impact of the dollars they’re investing in. Green bonds, in particular, are having a moment in the spotlight. 

What are Green Bonds?

The name’s Bond…Green Bond. Everyone loves a movie reference. 

Here’s a reminder of how bonds work: they are loans made by an investor to a corporation or government agency to fund operations or a project. Throughout the duration of the bond, the company or government agency pays an investor interest. Bonds have specific end dates called “maturity dates” where the issuer must return money to the investor. 

Green Bonds are bonds used to finance new and existing projects that address climate change and reduce carbon emissions. That’s it! 

A trillion-dollar sector 

The world’s first green bond was issued in 2007 by the European Investment Bank, created to fund low-carbon assets such as renewable energy or green buildings. The 2015 Paris Agreement on climate change had accelerated the market with issuances exceeding USD 80 billion in 2016. 

Apple funded 17 green bond projects in 2020, as part of its effort to go carbon neutral by 2030. Plus a handful of major banks and governments around the world are also diving in this space. 

Last year, the market surpassed $1 trillion in accumulative issuance. Climate Bonds Initiative expects the issuance of roughly an additional USD $400 billion during this year, up from over USD $250 billion in 2020. 

Chief Executive of CB Sean Kidney said in a conference in Sydney in April that Covid-19 is the perfect time for global leaders to jump on the opportunity of “rebuilding for the future”.  

“A lot of banks, if they’re highly exposed to fossil fuel portfolios or even auto company portfolios, may have more risk on the balance sheet than is necessarily evident by looking at a simple credit rating of those companies,”  Kidney says.

In Australia, the green bond market is growing rapidly. As of February 2021, the country’s cumulative green bond issuance has grown to around $15.6 billion AUD – a small slice of the global market. 

In March this year, Australian property company Lendlease followed up its first oversubscribed $500 million green bond with a second – $300 million 10-year fixed rate green bond. The second issuance received over $1 billion dollars worth of bids in less than 48 hours. It shows that there’s increasing demand for sustainable funds and investments and there aren’t enough bonds to keep up with it. 

“Every green bond that comes out is oversubscribed: anywhere between three and 10 times,”  Kidney says. 

How to invest

The traditional primary bond market, green or not, is heavily saturated with institutional investors like pension funds, insurance companies or hedge funds. The secondary market where investors purchase bonds from other investors is growing too but still very niche. The future trend of green bonds will target retail investors who can purchase individual bonds through a bond dealer, brokerage or bank or through a financial advisor. Another way is through pooled investment vehicles such as mutual funds or ETFs. 

One thing to bear in mind is, Green bond funds tend to have higher fees, higher average duration but a lower average yield to maturity than standard bonds. They have more exposure to BBB rated bonds which means they have higher exposure to credit and duration risk. As of now, they are best used as a complement to a portfolio, according to Morningstar

Final words

If we can produce multiple effective COVID-19 vaccines in 10 months rather than the usual 10 years, we can put the same amount of effort to find our own path to net zero and solve the climate change problem that’s been around since the early 19th century. 

Whether through green bonds or other green banking initiatives, financial institutions should be at the forefront of this powerful movement to keep people’s money clean by managing it in a sustainable way, investing in industries that do good and ultimately shaping the future we all live in. Check out this video from Bank of Australia a customer-owned bank creating a positive impact for people and the planet by investing in not-for-profit and renewable energy projects.