If a bond has a negative yield, then bondholders will lose their money on their investment. In the long run, their expectations will be lower and consequently they will lose the incentive to invest.
But green bonds don't seem to be fitting that profile. According to HSBC, around $80 billion worth of green bonds could be issued by the end of the year. This would represent almost 100% year-over-year growth.
A full 82% of them are rated at investment grade and they satisfy the medium long-term preferences of institutional investors, as well as covering a broad range of sectors. Investors are drawn to the liquid, fixed-income investments not only because of the potential benefit to their portfolios but also because they support socially responsible initiatives. That is, investors can obtain a solid financial return and have a positive impact on the world.
World Bank green bonds and IFC green bonds bring AAA ratings.
Green were created to fund projects that have positive environmental and/or climate benefits. The majority of the green bonds are green "use of proceeds" or asset-linked bonds.
Green bond proceeds are allocated exclusively to environmentally friendly projects. Many institutional investors, such as pension funds, now have mandates for sustainable, responsible investments and are developing strategies that address climate risks and opportunities in different asset classes. This comes as many consumers seek more socially conscious investments.
"Investors increasingly recognize the threats these forces create for long-term financial value and are increasingly considering it in their investment choices," said Laura Tlaiye, a Sustainability Advisor at the World Bank, one of the first and largest issuers of green bonds with more than $7 billion issued in 18 currencies.
Green bonds also give smaller investors a way to vote with their money. For example, Massachusetts, received more than 1,000 orders from investors for a green bond that it issued last year. Most of them are individual investors interested in supporting their local government's investment in the environment.
Green bonds enable capital-raising and investment for new and existing projects with environmental benefits. Recent activity indicates that the market for green bonds is developing rapidly.
The Green Bond Principles (GBP) are voluntary process guidelines that recommend transparency and disclosure and promote integrity in the development of the green bond market by clarifying the approach for issuing a green bond.
GBP is intended for broad use by the market: they provide issuers guidance on the key components in launching a credible green bond. They aid investors by providing information to evaluate the environmental impact of their green bond investments, and they assist underwriters by moving the market toward standard disclosures which facilitate transactions.
To help investors evaluate green bonds, MSCI/Barclays and others have also launched green bond indexes that score issuers and check their project selection criteria and management of proceeds to ensure the promised use and ongoing reporting.
Green bonds have definitely become an exciting market development with demand from investors consistently outstripping supply. If this is of interest to you, take a look at these Green Bond ETFs.
This article is commentary by an independent contributor. Chris Vermeulen is full-time trader and research analyst for TheGoldAndOilGuy Newsletter.