Don’t be cynical about green bonds

Thanks to “green bonds” investors can now invest and earn karma points at the same time. Nothing wrong with that.

The times that only weed-smoking, Volkswagen-van-driving hippies cared about the environment have long passed.

Environmentalism is mainstream. Even in the stock markets, where green investing has grown exponentially over the years.

In 2012 investors poured $3bn in something called “green bonds”. Last year this market had grown to $161bn, while it’s on track to reach $250bn this year.

Green bonds could become a $1trn a year market by 2020.

As demand for green investing rises, so does cynicism about whether these investments do anything more for investors than giving them karma points.

Companies and governments jumping on the green bandwagon could even take well-intentioned investors for a ride, critical voices say.

It’s easy to be cynical about “do-good investing”, but there’s actually no harm in investing in green bonds in the short run.

In the long run, green investors may actually have the last laugh.

Define “green”

Green bonds, like ordinary bonds, are IOUs issued by companies or governments.

What makes them “green” is that the issuer promises to use your money in a way that will benefit the environment.

Last year Apple issued $1bn in debt to foster a host of environmentally focused initiatives.

Toyota sold $1.6bn in green bonds to fund the production of hybrid-gas electric cars.

Green bonds tend to do the world a lot of good with the proceeds going to green projects like clean water, renewable energy, and energy efficiency.

Investors like buying green bonds and companies like selling them. So why the cynicism?

Well firstly, it being a new market and all, there isn’t a universal definition of what a green bond is. There are fifty shades of green, so to speak.

Climate Bonds Initiative, a London non-profit, already excluded $24.5bn worth of “green” bonds from its index this year because they weren’t deemed green enough.

Which brings us to the second problem.

Once it’s known that a certain label is in demand, everyone starts using that label regardless of whether it’s fitting or not.

China and other developing countries living in perpetual smog and no longer familiar with the colour green, have started offering “green bonds” too.

Taiwan Power Company, a state-owned electricity provider, recently issued $271m in “green” bonds to spend on its gas and coal power stations.

Companies are just slapping on the label “green” in a cynical ploy to receive favouritism where they deserve none.

“Definitions can be a problem across the burgeoning market for environmental, social and governance-driven investing,” write Mike Bird and Manju Dalal in the Wall Street Journal.

“Companies that sell bonds labelled “green” are often responding to favourable treatment of the securities.”

In the Arabian folktale Ali Baba and the Forty Thieves, woodcutter Ali Baba discovers the magic phrase to enter a thieves’ den is “Open Sesame”.

In the 21st century, the magic word that opens doors which remain closed to others is “green”.

“In China, for example, banks can borrow at advantageous terms from the central bank using green bonds issued by banks as collateral, when similar nongreen bonds wouldn’t be accepted. Issuers can also win fast-tracked approval to sell new debt.”

Every company wants to be seen as environmental friendly, sustainable, and socially responsible. Not all of them will be.

Still, it’s a little too easy to dismiss the whole green bond market altogether.

No harm in “doing the right thing”

Lots of companies and governments will try to jump on the green bandwagon.

They see a booming market and will try to take advantage of it even when their bonds aren’t exactly green.

This in itself isn’t a reason not to invest in green bonds.

After all, name one market where fraudsters aren’t trying to scam investors.

When the market for “dot coms” was booming, plenty of companies that would never go anywhere raised millions.

When bitcoin delivered extraordinary returns, thousands of dead-end cryptocurrencies flooded the market to try and capitalise on the hype.

Of course, the same was going to happen to green bonds as soon as the market took off.

The real lesson here isn’t that you shouldn’t invest in green bonds; it’s that you should always know where your money goes, and do your due diligence, before you hand over your hard-earned money.

In fact, companies issuing green bonds are often required to share more details about why the money is raised and how they plan to invest it compared to other bonds.

And with green bonds soon becoming a trillion dollar market, it’s only a matter of time before green bonds will be properly regulated.

A more pressing question might be: does green investing come with a cost?

In other words, do investors miss out on bigger returns when they put their money in environmental-friendly investments?

Adding exposure to green bonds has “minimal immediate impact” on an investor’s portfolio, says New York-based investment management firm VanEck.

In fact, it may represent “a ‘free option’ to hedge climate-related risks”:

“In a world where investors start to place a significant price on environmental risks, green bonds may provide protection versus a bond portfolio that does not take these factors into account.”

With every government but one signing the Paris Agreement to counter climate change, most companies and industries will be nudged, if not forced, to “go green” in the future.

Companies investing in sustainable initiatives now are simply ahead of the curve.

Green bonds are getting more popular by the day and leave investors no worse off. Who says you can’t do good and earn a little income at the same time?

For a growing number of people, investing never felt better.

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