Monday, 4 February 2019

A Look at Green Bonds


As readers will know, I am increasingly concerned about climate change. The environmental risks dominated the recent World Economic Forum Global Risk Report 2019 (pdf). The authors of the report were so concerned they said "of all the risks, it is in relation to the environment that the world is most clearly sleepwalking into catastophe". 

The report from the IPCC last October made clear that if we allow global warming to rise above 1.5C, it could be far more dangerous than we thought just a few years previously. Over recent months I have started to make a few changes to my portfolio to reflect my concern about these issues and have been exploring a few 'green' investment options. 

We have just seen the hottest month on record in Australia followed by unprecedented flooding in Queensland. 

Average over 30C in January 

In Canada and US there has been extreme cold weather from a polar vortex caused by warming of the Arctic region. 

Minus 60C in Chicago in January

If nothing much changes, we are currently on track to reach 1.5C by 2040 and then 2.0C by 2060. We clearly need to make some big changes over the next decade to avoid a worst-case scenario. The global community is starting to implement some of these changes and businesses and governments are responding to the challenges so I remain optimistic.

On a personal level, I introduced a couple of green funds to my portfolio last year and I intend to increase the green allocation of my portfolio to at least 10% by the end of this year. However, both are equity based so I would like to have a little more balance so I have been considering green bonds, also referred to as climate bonds.

What Are They?

Much like conventional bonds, it is a bond which generally offers a fixed rate of return for a specified period of time however with the green bonds, the money raised is specifically earmarked for climate-related projects. These could be for projects to support a range of green initiatives such as energy efficiency, renewable energy, sustainable agriculture, cleaner transport, protection of ecosystems and environmentally friendly technology.

They are typically issued by large institutions such as the World Bank or European Investment Bank or by governments - sovereign green bonds - and to qualify for the tax advantages they offer, they need to have green bond status which involves verification from a third party such as Climate Bond Standard Board.

The London Stock Exchange introduced a dedicated green bonds section in 2015.

Popularity

These bonds have been around for over a decade and are mostly only available to institutional investors such as pension funds. In 2012 these bonds issued around $2.6bn however in recent years there has been a huge surge in demand and by 2017 this had increased to $162bn. In 2018, over 1,500 were issued raising $167bn for green projects. The forecast for the coming year is $200bn.

This is just a drop in the ocean however as the IPCC calculated that we need to spend $2.4 trillion EVERY YEAR to 2035 to tackle climate change.



What's Available?

Access to these bonds is still mainly for institutional investors such as the large insurers and pension funds. However a couple of exchange traded funds have been launched for the UK retail investor in the past year or so.

iShares Green Bond Index (IE) which has ongoing charges of 0.22%

Lyxor Green Bond ETF (CLIM) with charges of 0.25%

VanEck Vectors Green Bond (GRNB) based on US market.

So today, I dipped a toe in the water with an initial purchase of the offering from Lyxor for my ISA. This has been funded from a sale of my holding in City of London trust. I am sure more green bond funds will be made available to the retail investor over the coming year or two so will hold back for a while and just see how I go with this for the time being.

Returns have not been so good over the past year for these bonds - maybe 1% or 2% but that was probably a little better than for global equities generally. They may not provide the same longer term returns as equities but I guess not all profit is quantifiable. Many investors are increasingly aware of the importance of tackling climate change but translating that awareness into concrete investment decisions can be challenging. The bonds offer me some diversity combined with the knowledge that my money is helping to hopefully change things in a positive way.

Further reading:




As ever, this article is merely a record of my personal investment decisions and should not be regarded as an endorsement or recommendation - always DYOR!

2 comments:

  1. another option is to invest in trusts like Greencoat Wind (UKW) which invests in wind power in the UK.
    I've invested in a few community green energy projects precisely for the green credentials and for the tax breaks (no longer available).
    Abundance Generation is also an option for those who enjoy P2P.

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    1. Yes, I covered these options in an article last November
      http://diyinvestoruk.blogspot.com/2018/11/investing-for-green-future-part-1.html

      One drawback is the hefty premiums to net assets at present for most of the sector but certainly on my watchlist. In the meantime I do have some indirect exposure to this sector via my Capital Gearing trust.

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