What do Apple, Amsterdam’s Royal Schiphol Airport, and the Seychelles have in common?

They are all part of a growing number of corporations and governments worldwide who are taking a greener route to issue bonds to fund projects. In fact, labeled green bond issuance reached a milestone in the first half of 2019, surpassing $100 billion inside six months, according to the Climate Bonds Initiative.

Green bonds are being issued to finance projects with environmental benefits like climate change adaptation, energy efficiency, clean transportation and water and waste management. Issuing green bonds can also help to attract new green investors, diversifying an issuer’s investor base. Green bonds are structured just like regular bonds but have the added benefits of transparent use of proceeds and measurable environmental impacts.

Charles Portier, fixed income portfolio manager at Mirova, is witnessing stronger green bond issuance across the overall universe, with the largest growth in issuance primarily coming from corporates. More and more utility companies, for example, are looking to investors for help in responding to the challenges of a warming world. “In the utilities sector, we’re seeing companies transition their business models to become more sustainable. They are looking for solutions to reduce their dependence on fossil fuels and relying more on renewable energy production,” said Portier.

Eco-friendly tech
Apple Inc. has undertaken two green bond issuances worth a combined $2.5 billion – the largest of any US corporation as of June 2019. The proceeds have gone to fund renewable energy projects and support environmental research and innovation. Apple used proceeds raised from a green bond to develop a custom alloy made of 100% recycled aluminum which it now uses in its products – including the MacBook Air and Mac mini.1 Apple announced in 2018 that all of its global facilities are powered by 100% renewable energy and the company has undertaken efforts to encourage its suppliers to join their commitment to clean power.

A cleaner airport
Airplane travel is a major source of carbon emissions globally, but some operators in the sector are making concerted efforts to do business more sustainably. Royal Schiphol Airport in Amsterdam has a goal to be the world’s most sustainable airport, achieving “zero waste” (no trash to landfills) by 2030 and becoming carbon neutral by 2040. Schiphol has issued a green bond to finance their carbon reduction efforts, including the construction of energy-efficient green buildings and the development of electric vehicle infrastructure throughout the facility.

Green acres
The real estate sector is also undergoing change as trends toward more sustainable business practices gain strength worldwide. Digital Realty Trust Inc. is a real estate investment trust (REIT) that operates data centers worldwide. It has issued green bonds to finance the construction of certified sustainable, energy-efficient buildings in its network, improvement of resource-efficiency of its properties, and investments in renewable energy and energy storage systems.

Interest in the future
In 2018, over $100 billion in green bonds were issued worldwide.2 France, Belgium, Indonesia, Ireland, Lithuania, Poland and the Seychelles have all issued sovereign green bonds to fund sustainable, environmentally focused projects. In the first half of 2019, we also saw Chile and the Netherlands come to market with their first green sovereign issuances. The total market size for green bonds is now over $400 billion.

Increasing demand for green bond issuances is evidence that interest in these assets is likely to grow over the long term, as both business, investors, and governments are looking to participate in fostering a more sustainable global economy.

Comparable yields of green bonds
Green bonds are issued on the primary market priced similarly to their non-green counterparts. For example, if a corporate issues a green bond and a non-green bond with the same terms, they should have a similar spread over government bonds given the same credit profile. “Eligibility requirements for the Barclays index that tracks the green bond market are nearly the same as for traditional Barclays aggregate bond indexes,” said Portier, adding “If you look under the hood of the traditional index, you’ll actually find those green bonds in there.”

At the end of the day, green bonds offer investors the same potential portfolio benefits as conventional bonds. But they differ from conventional bonds in that they can answer for an investor’s desire to allocate capital proactively.

 

1 Source: https://www.apple.com/newsroom/2019/04/apple-tops-clean-energy-goal-with-new-supplier-commitments/

2 Source: https://www.climatebonds.net/resources/reports/2018-green-bond-market-highlights

Investing involves risk, including the risk of loss. Sustainable investing focuses on investments in companies that relate to certain sustainable development themes and demonstrate adherence to environmental, social and governance (ESG) practices; therefore the universe of investments may be limited and investors may not be able to take advantage of the same opportunities or market trends as investors that do not use such criteria. This could have a negative impact on an investor's overall performance depending on whether such investments are in or out of favor.

This material is provided for informational purposes only and should not be construed as investment advice. There can be no assurance that developments will transpire as forecasted. Actual results may vary. The views and opinions expressed may change based on market and other conditions.

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