When it comes to incorporating environmental, social, and governance (ESG) considerations, green bonds have come to the forefront the of financing solutions for environmental and social problems. Yet green and sustainable bond and loan financing by companies has slowed as many firms have had to deal with urgent funding needs amid the coronavirus crisis.
How green does your portfolio look?
The fixed income market is, with increasing frequency, being used as a tool to solve or combat problems, whether climate change or COVID-19. Environmental Finance’s bond database shows that green bond issuance has stalled in recent months, but it has been replaced with issues of COVID-19 bonds, which often carry social or sustainability labels.
Green bond performance is now starting to deliver what’s being called “greenium.” UBS analysts said in late March that they expected green bonds to show “lower volatility and smaller drawdowns” during stressful market periods, according to Bloomberg Green. Green bonds have “proven to be a more defensive way to invest in investment grade debt,” said Thomas Wacker, head of credit research at UBS.
David Zahn, head of European fixed income at Franklin Templeton Investments, said “this is the opportunity that you can actually try to put in policies to limit the amount of carbon emissions over the next several years.”
The World Bank & Green Bonds
The mission of the World Bank is to end extreme poverty and boost shared prosperity in a sustainable manner. Tackling climate change plays a critical role in achieving these goals. Through World Bank Green Bonds, investors make an impact by supporting the financing of a wide range of projects across many sectors that address climate change.
Renewable Energy & Energy Efficiency and Clean Transportation made up the largest portion in the Green Bond eligible projects portfolio in 2019. They comprised approximately 66% of all Green Bond commitments. Projects included the categories of mitigation and adaptation.
Mitigation:
- Solar and wind installations
- Funding for new technologies that permit significant reductions in greenhouse gas emissions
- Rehabilitation of power plants and transmission facilities to reduce greenhouse gas emissions
- Greater efficiency in transportation, including fuel switching and mass transport
- Waste management (methane emission) and construction of energy-efficient buildings
- Carbon reduction through reforestation and avoided deforestation
Adaptation:
- Protection against flooding (including reforestation and watershed
management) - Food security improvement and implementing stressresilient agricultural
systems (which slow down deforestation) - Sustainable forest management and avoided deforestation
Image retrieved from BART.gov
As climate action and risk become increasingly central to public policy-making and corporate strategy, institutional investors are also increasing their focus on environmental governance practices, management systems, and investment criteria. Green debt issuance went from a single bond in 2007 to nearly $258 billion from nearly 500 issuers in 2019. The total amount will need to expand to meet the world’s need for alternatives to fossil fuel. The field is evolving, and experts are developing various means of certifying and rating projects.
Green bonds offer a direct way to reduce a portfolio’s carbon footprint, while offering performance potential from a growing market. Isn’t it time to talk to your financial advisor about what green bonds provide you in terms of financial performance?
Featured image by Chanan Bos/CleanTechnica
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