Green bonds work like the typical bond. An issuer sells the bond, then pays the buyer interest on the bond. In the meantime, the issuer uses the money to fund projects. In the case of green bonds, a company, government, or organization uses the money raised from bonds to fund projects that help the environment. The bonds are meant to reduce climate impact by using some or all of the money raised on a variety of green projects, including:
Energy efficiency upgradesClean energy tech projectsMass transit improvementBuilding wind farmsDecrease carbon outputEnvironmentally sustainable housing
Generally speaking, green bond performance tracks with bigger bond indexes like the Bloomberg Global Aggregate Index.
Examples of Green Bonds
Here are a couple examples of green bonds offered by reputable organizations and government entities:
The World Bank’s Green Bond Program
The World Bank was the first to use a green bond for funding, which started the practice in 2008. In 2019, it raised over $13 billion in funding for bonds related to climate change. By 2021, the World Bank’s program had given more than $16 billion to multiple programs, including renewable energy, transportation, forest restoration, and reforestation, and providing 8.5 million people with improved water sources.
Massachusetts Clean Water Trust
The state of Massachusetts issued the first green security in the U.S. In April 2021, it sold around $351 million worth of green and sustainability bonds. The state discloses the projects that have been funded with the bonds, providing socially conscious investors with the means to track how the money is being put to work. Since 2015, the Commonwealth of Massachusetts Clean Water Trust has raised hundreds of millions to fund wastewater and drinking water infrastructure projects through the state’s green bonds.
Advantages of Green Bonds
Green bonds provide you with a way to earn income that is exempt from taxes. You’ll also know that there’s a good chance the money you lend to a corporation is being used in a way that is not harmful. Companies that use green bonds for funding also benefit. The green angle attracts a growing number of people who are more aware of and want to act to help fight climate change. Higher demand for green bonds equals lower costs to borrow money. Lower costs mean reduced spending for a business. These savings are either passed down to you in the form of a dividend or used to lower the costs for funds.
How To Buy Green Bonds
One of the easiest ways to invest in green bonds is to buy shares of a socially responsible fund. There aren’t many bond funds in the environmental, social, and governance (ESG) market, as stock funds make up the bulk of this segment. Some of the fund choices are:
TIAA-Core Impact Bond Fund (TSBIX)Domini Social Bond Fund (DSBFX)Praxis Impact Bond Fund (MIIAX)Pax World High Yield Bond Fund (PAXHX)iShares Global Green Bond ETF (BGRN)VanEck Vectors Green Bond ETF (GRNB)
You can also buy individual green bonds through a broker, but the cost could be significantly higher than a share of a bond fund, for example.
Developments in Green Bond Funds
In 2019, HSBC Global Asset Management launched a green bond fund for emerging markets, sending more signals that green investments and investor concern for the environment should not be taken lightly. China is aiming to be carbon-neutral by 2060. As the largest producer of greenhouse gases in the world, it will need a lot of green capital to reach its goals. Analysts expect a high amount of green debt to be issued from China in the next few decades. Green bonds may not yield the highest returns, but not all profit is quantifiable. Green bonds give you the option to have a portfolio with income and a chance to invest responsibly.
