Clever Economy

Green Bonds: What They Are and How to Invest

Like their sustainable fund cousins, green bonds have become more popular than ever. As investors are looking for new ways to green up their portfolios and companies are looking to finance more green projects, green bonds are stepping in as the answer to both problems.

Green bond definition
A green bond is a fixed-income investment used to finance environmental and sustainable projects. Green bonds can be issued by governments, organizations and companies. These bonds can help fund renewable energy (such as wind, solar and hydro), recycling efforts, clean transportation and sustainable forestry.

How green bonds work and how to invest
If a company or government wants to finance a green project, it can issue green bonds to help secure funding. Investors buy the bonds and the company or government pays them back over time with interest. But the investors aren’t often everyday investors — green bonds are usually sold to larger organizations such as pension funds that can buy bonds in bulk.

Individual investors can invest in exchange-traded funds and mutual funds that include green bonds in their offerings, such as the Calvert Green Bond Fund and the iShares Global Green Bond ETF. If you choose to invest in one of those funds, you can indirectly gain exposure to green bonds. Green bonds themselves are often accessible only to institutional investors, not individuals.

Green Bond Principles
The “Green Bond Principles” were established in 2014 by a collective of investment banks to help investors gain insight into the sustainability of their investments. Here are the principles:

1. Use of Proceeds: This governs how bond funds can be spent and outlines eligible green projects, such as renewable energy production and transmission, energy efficiency in buildings, pollution prevention and sustainable land management.

2. Process for Project Evaluation and Selection: This explains what the green bond issuer should communicate to investors, such as the project’s objectives.

3. Management of Proceeds: This indicates how the funds generated by the bond should be handled.

4. Reporting: This explains how the green bond’s progress and impact should be recorded. Ideally, issuers will release an impact report with relevant details.

Why invest in green bonds
Green bonds can help investors put their money where their values are. Much like investing in environmental, social and governance, or ESG, investments, green bonds have a mission built into the investment itself.

Green bonds can also have tax incentives in the form of tax exemption and tax credits. This way, issuers may not have to pay interest on their issuances and investors may not have to pay income tax on the interest they earn.

Green bond examples
According to research from the Climate Bonds Initiative, green bond issuance amounted to $297 billion in 2020 — up more than 246% from 2016. These green bonds have funded everything from wind farms to electric car projects. Here are a few examples of what green bonds have helped finance:

Walmart closed its first green bond in September 2021, announcing that it will allocate an amount equal to its net proceeds from the $2 billion offering to projects such as making its facilities more energy efficient, waste recycling and water conservation.

Apple funded 17 green bond projects in 2020. Those projects will help prevent 921,000 metric tons of carbon emissions from being released every year. The projects also included a solar power development outside Fredericksburg, Virginia, that delivers energy to the grid, and a wind farm near Chicago that covers Apple’s electricity use in that region.

Volkswagen issued a green bond in September 2020 that will help fund electric car manufacturing and e-charging station infrastructure.

Green bonds vs. blue bonds
While green bonds are used to fund a variety of environmental projects, blue bonds specifically fund water-related projects. Blue bonds have raised money for wastewater treatment and removing plastic waste in ocean water. Blue bonds, like their verdant cousins, are not likely to be available to the average investor.

If you’re looking for ways to invest green (or blue), you may want to consider ESG funds. You’ll likely be able to find a fund that matches your particular values — and many ESG funds have a low entry cost.

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