Green Bonds: A First Step Toward Socially Responsible Investing?

2020 has brought to light important social justice and environmental issues amidst the coronavirus pandemic and recent political unrest. If you’re like many Americans, these times of uncertainty may have reignited your passion for using your resources to make the world a better place. In terms of investing, green bonds may be an important first step in transitioning toward a socially responsible or values-aligned portfolio.

Green bonds can help you make a positive impact on the environment, and they’ve been growing in popularity over the years. Below we’ve gathered up what you should know about this investment option and answered a few common questions to help you decide if this may be right for you.

In 2008, The World Bank issued the first green bond with a goal to sustainably end extreme poverty and boost prosperity.1 To achieve this, proceeds from green bonds are used to fund environmentally friendly projects around the world. Eligible projects are typically sponsored by the government and can include solar and wind installations, waste management, reforestation and more. Having just started a little over a decade ago, this segment of the bond market has been growing steadily over the years. The World Bank has issued 158 green bonds, totaling over $13 billion in funds for environmentally friendly projects.1 As investors become even more concerned with climate change, the number of green bonds on the market is expected to rise.

Green Bonds are typically purchased by institutional investors with an environmental focus or an ESG mandate. Investment managers, governments and corporate investors are also able to purchase green bonds.2 For individual investors interested in purchasing green bonds, more diverse offerings may become available as the market segment continues to grow.

Criteria used to determine what constitutes a “green bond” is primarily decided by the issuer. As the market for green bonds grows, it’s possible a more universal standard of criteria may be created.

To offer a better understanding of what may qualify as a green bond, NASDAQ created some voluntary guidelines for issuers in conjunction with the launch of their Sustainable Bond Market. Their criteria include:3

Use of Proceeds - The proceeds of the bond must go towards projects that produce clear environmental benefits.

Third-Party Review - The green bond needs to be reviewed by an experienced and reliable third-party. The four types of third-party reviews generally accepted include a consultant review, certification, verification and rating.

Reporting - Transparent and detailed reporting is required to keep investors informed and assured that their investments are helping the environment. 

Exclusions - A bond is able to be removed if it is no longer compliant with use of proceeds, does not meet reporting obligations or is involved in a controversy. 

Green bonds offer investors an opportunity to align their wealth with their desire to make a positive environmental impact. For issuers, green bonds can be an attractive option for young investors and others who are seeking a socially responsible alternative to traditional investments.

Green bonds give investors the ability to consider the environment while diversifying their investment portfolio. If you’ve been looking for a socially responsible investment opportunity and have a passion for the environment, green bonds may be an appealing option to consider.

Sources:

http://pubdocs.worldbank.org/en/790081576615720375/IBRD-Green-Bond-Impact-Report-FY-2019.pdf

http://www.gogreenbonds.org/faqs/

https://www.nasdaq.com/docs/Nasdaq-Green-Bond-Criteria_v2.pdf