Interested in doing something good for your own financial future as well as the future of the planet? Green bonds might be the way to go. But, as with any investment, it pays to understand the process, the risks, and where exactly your money is going—so here’s a quick guide to climate-focused investing via green bonds.
What Are Green Bonds?
Like all bonds, a green bond is a fixed-income investment. Being fixed-income means that at a specific date in the future, investors are repaid their principal as well as a set interest rate. While no investment is completely risk free, fixed-income investments carry a much lower risk than stocks. Because you’re not “playing the market”, your investment won’t fluctuate up or down depending on a company’s success or failure, or the broader economic factors.
What differentiates a green bond from other types of bonds is that your investment is guaranteed to be spent on “green” projects. These may be ongoing projects designed to help the environment, or new projects which investors are trying to get off the ground. Your money might be used to fund an offshore wind farm, or support sustainable agriculture, or to finance an up-and-coming research project on green transportation. Bonds that fund ocean-specific projects may be included under the umbrella of green bonds, and these are also known as “blue bonds”.
How Do I Buy Green Bonds?
Speaking with a qualified financial advisor is a smart first step for any investment strategy, which might include the purchase of green bonds. Investors often choose a balanced strategy including mutual funds and/or EFTs which offer exposure to green bonds. If climate and sustainability projects are important to you, speak with your retirement or financial advisor about how you can integrate more green investments into your overall portfolio.
While it’s also possible to buy individual green bonds, the process can be more complex. A broker can walk you through the ins and outs, but keep in mind that a wider, more balanced investment into a number of green projects at the same time is generally considered the safer option for your long-term finances.
For more information on sustainable investing, including and beyond green bonds, check out this article from HUECU.
Who Issues Green Bonds?
Many investors want to understand more about where green bonds come room. It’s an important question to ask. Who is raising money, and for what project? How can investors be sure that their money is going to fund projects aligned to their own values?
Green bonds can be issued by governments as well as private companies or non-governmental organizations. The first institution to issue a green bond, in the late 00s, was the World Bank. Today, the World Bank continues to be a major player in the field of green bonds: issuing around US$18 billion in green bonds since 2008. If you’re concerned about greenwashing, the International Finance Corporation under the World Bank Group is a great resource; and as always, consider working with an investment professional who can direct you on choosing green bonds that invest in projects you believe in while offering the right balance of potential risk and return.
Risk, Return, and Tax Rewards
All investments carry some degree of risk. While bonds are understood to carry a lower risk relative to stock investments, there’s still a chance that your bond issuer could default on a payment—meaning you don’t earn the income you were promised.
The best way to mitigate your risk is to choose bonds from reputable issuers. If a company selling a bond has a low credit rating, steer clear: there may be a risk of default. You can also check the investment grade of bonds. Aim for ratings of BBB and above, and make sure your financial advisor understands the role of green bonds in your long-term investment strategy.
Some green bonds offer tax incentives to investors, so you can earn interest on your bonds without paying taxes on that investment income. However, not all bonds are exempt from taxes. Check in with your advisor or read the fine print carefully before choosing green bonds if receiving tax credits or exemptions is important to you.