Shades of green: the rise of green bonds and sustainable investments
In the wake of the Covid-19 pandemic, governments and businesses will focus their attention on reconstruction, including the shift to more environmentally sustainable economies. As a result, issuers of all types use green bonds to finance projects related to environmental initiatives.
On a steady upward trajectory in recent years, green bonds are a growing category of fixed income securities that raise capital for projects with environmental benefits, such as renewable energy or low carbon transportation. Although they represent only a small portion of the total global bond market – around 4% – green bonds reached a record high of almost US $ 270 billion at the end of 2020. New issues could reach 400 at $ 450 billion this year, according to a report from the London-based nonprofit Climate Bonds Initiative, which promotes investment in a low-carbon economy. Due to strong demand relative to the overall bond market, green bonds have shown relatively strong resistance during market volatility related to the pandemic.
“The green bond market is growing very quickly,” says Angus Young, senior lecturer and researcher in the Department of Accounting and Law at Hong Kong Baptist University and the Center for Corporate Governance and Financial Policy. He adds that by not including green bonds in a fixed income portfolio allocation, investors could miss an opportunity for asset diversification.
As the green bond market grows and evolves, Young says the most important question investors need to ask is: What makes a green bond? Unlike conventional bond issues, which usually do not include specific reports on the use of the proceeds, when an organization issues green bonds, it is expected to provide assurances that the raised capital is allocated to projects as intended, in areas such as renewable energy, public transport, energy-efficient buildings and manufacturing, farmland management, waste management and water.
For an investor looking for green bonds, another major question concerns the returns and financial risks they expect to bear. An important feature of green bonds is that even though the proceeds are collected for a stipulated green project, the repayment is tied to the issuing company and not to the success or failure of the project.
While the increase in green bond issuance means more choice for investors, it also means that they need to exercise more judgment to avoid greenwashing – with issuers exaggerating their green credentials or the intended use of fund financing. green bonds, or even running out of sync with the concept. sustainability.
Apart from the large rating agencies, investors currently have limited access to a consistent method of valuing the individual elements of green bonds, which can vary considerably from sector to sector. There is no global consensus on the standardization or types of investment projects, green definitions and verification that fall within the scope of green bonds.
“Since fund managers have done the research and can act as a hedge against greenwashing, one of the easiest ways for investors to get into green bonds is to invest in green bond funds. Young says. Another way for investors to avoid investing in greenwashing programs in Hong Kong is to seek funds that have Green Finance certification, developed by the Hong Kong Quality Assurance Agency.
Many leading political and economic authorities around the world, including the former Governor of the Bank of England and United Nations Special Envoy for Climate Action and Finance, Mark Carney, estimate that 2 to US $ 3 trillion in capital will be needed each year. for the next 30 years to mitigate climate-related worst-case scenarios and other environmental scenarios. As bond markets are expected to provide much of this funding, the future for green bonds looks positive.
See also: 4 women investors who use their capital to drive positive social change