What is a Green Bond, how are they different from regular bonds and would they be a good investment for you?
A green bond is no different in its basic design and how it functions compared to regular non-green corporate and government bonds.
The difference is the purpose for which the bond is issued, and the funds are raised. The issuers of the Green Bonds (who are the borrowers) raise the money for green investments and projects.
There is no set definition for “green” in relation to green bonds, but generally, the bonds are issued to secure financing for projects that will have a positive environmental impact. For example; renewable and sustainable energy. conservation, clean fuels and transportation, restoring the ecosystem or working towards reducing pollution. Investors who purchase these bonds do so with the expectation of making make a profit, whilst supporting green causes as well as achieving other financial benefits (such as potential tax benefits).
Green bonds work in the same way as standard corporate or government bonds.
Funds are raised by the issue of the bond, with the bond issuer being the borrower. An interest payment amount is agreed upon as part of setting up the bond (the coupon) and the bondholder receives this (usually fixed) amount of regular income. When it is time to redeem the bond then the issuer repurchases it. Green bonds may also be traded, just like regular bonds. However, there must be someone willing to purchase the bond, as not all bonds are traded on an exchange.
Many Green bonds also have their ethical status checked and verified (if they are truly “green”) by a third party, such as the Climate Bonds Standards Board*, to ensure that the bond truly is green and that there is no “greenwashing” going on.
One of the main risks with green bonds is the same as that of regular bonds: that they perform poorly and you do not achieve what you intended. The company behind the bonds (the issuer) can fail, meaning the bond is worth either nothing or a fraction of what was paid. If you do not intend to hold the bond to maturity and are relying on its market value to change, then a poor performance may cause you to be unable to sell it for what you anticipated.
“Greenwashing” is also a risk with green bonds. ‘Greenwashing’ is where companies claim to be pursuing green goals with the funds raised from the bonds, but instead, use the money for investments that have little or no environmental value. Even if it is not as stark as raising money for a green cause and investing in one that is not, there are legitimate green causes for investors that simply are not as “green” as is made out, although there may be some green benefits.
If a Green Bond is right for you depends on your individual and personal situation. First, you need to determine if a bond (or indeed investing at all) is right for you and your investment portfolio. Bonds are a part of many people’s pensions or investment portfolios, but it does not mean they should be part of everyone’s. You may find when searching for the right bonds or bond funds that you end up with a bond that happens to be green as the right one for you.
If you are focused on building a green pension or investment portfolio then filtering your bond choices to only those that are green will help you make sure that all of your portfolio is green-focused. However, there are differences between green bonds compared to their mainstream counterparts. As discussed there is the risk of green washing, meaning you have to be more careful in your research. There are other risks as well due to the green bond market being much more of a recent development and as such a less mature market with less liquidity, history, and choice.
Green bonds can be a key part of a green and ethical pension or investment portfolio. Alongside Equities, bonds are a key investment product in many people’s portfolios, and the increasing availability of green bonds is a positive step towards helping everyone build a green investment portfolio. Please visit our dedicated page on green pensions and investments if you would like to find out more. Many people have sizable pension pots invested mostly in mainstream companies, which are often far from ethical and green. Repositioning your pension pot into green and ethical companies can be one of the most effective ways to make a positive change for many people, who do not realise the potential.
The UK government-backed National Savings and investments (NS&I) has started to offer Green savings Bonds*. Like all money raised by NS&I it is used for public spending by the government, although in the case of green bonds, it is to be diverted into green projects only. They currently (January 2023) offer 3-year fixed rate bonds, where you cannot withdraw your funds before the bond is finished, offering amounts between £100 and £100,000. As the money is backed by the UK government, the entire amount is protected, unlike the usual £85,000 limit for your deposits with banks.
A bond being green in itself is not necessarily a factor as to whether it is a good investment or not. When deciding on whether to invest in green bonds or not, the same process should be followed as with normal bonds and investments. Deciding if a bond fits in with your investment goals, risk appetite, the rest of your portfolio and investment horizon are important first steps for most investors. A bond being green may be an indication that the issuer has a more natural long-term outlook (which is good if you are a long-term investor) but most of the benefit from a green bond is using your investments to help support a greener future for the world, rather than any potential highest returns that you may expect.
As a Green Bond is basically a sub-set of regular bonds, then they are usually purchased in the same way as a bond that is not deemed “green”. Bonds can be purchased individually or as part of a larger fund that may hold green bonds or a mix of green bonds and other assets, such as “green equities” – shares in green and ethical companies. Individual bonds and bond funds can be purchased from all major UK stock brokers, such as Hargreaves Lansdown* or AJ Bell*, although what they have on offer will vary between companies and you may need to call their trading desk for more rare bonds and funds.
A Financial Adviser can help with the process of purchasing Green Bonds on your behalf, as well as helping determine the right bonds for you and help with any other information needed to help understand and pick the right bonds. Leaf Financial Advisers are able to assist with the selection and purchase of Green Bonds, please get in touch if you’d like to find out more.
Green Bonds are becoming more popular and widely available, as more companies recognise that they can raise funds for their green projects in this way and as more of the public becomes aware of the ability to invest in bonds that align with their green and ethical views. It is difficult to say if green bonds perform better than their non-green counterparts, and although there can be a case made for a green bond being a naturally better-performing type of bond, there is little evidence that this is the case. The main case for investing in green bonds seems to be the ability to use your investments to also help green causes as well as hopefully making a return on your investments.
You must be careful to avoid “greenwashing”, where companies make out that the money raised is for green purposes, where the actual use would be considered far from green. It is also important to not lose sight of your overall investment goals, especially the amount of investment risk you are happy taking on.
If you would like to discuss green bonds or green investing in general in more detail, then please give us a ring on 01173 823 823. We are Financial Advisors who have experience in creating green investment portfolios and investing in green bonds for their clients. We are always happy to talk and offer a free consultation.
01173 823 823
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01173 823 823