Bonds are a common, if not particularly exciting, investment tool.
People buy bonds when they have money to loan and someone else – typically a corporation or government—needs to borrow. A bond is just a loan, offered at a specific interest rate, known as a coupon, that varies based on factors like who’s borrowing the money, how much they borrow, and when they plan to pay the money back.
Sounds simple, right? It is.
So why create a whole new category of bonds?
Because if you care about climate change, you want to know that your investments aren’t going to increase greenhouse gas emissions or perpetuate reliance on fossil fuels. What’s an investor to do?
Enter Green Bonds! They’re just like regular bonds, only when you invest in a Green Bond you know that you’re loaning money to businesses committed to fighting climate change and facilitating the adoption of climate-friendly technologies, like environmentally friendly factories, wind, and solar energy, says the World Bank.
Green Bond issuance has sprung up nearly overnight. The first Green Bonds date back to only 2008, yet they are forecasted to reach more than US$70 billion in 2015, according to the Climate Bonds Initiative.
It’s no surprise that the market for Green Bonds is ballooning, given how much attention climate change is getting and the global shift towards more eco-friendly and conscious capitalism.
The other reason for the rapid increase in Green Bond purchases is the fact that many pension-fund managers, governments, and private asset managers see Green Bonds as an easy hedge against the risk of equities that are exposed to the questions surrounding increasing regulation. The logic is that as fossil fuel emissions and carbon become more heavily regulated and taxed, the companies that profit from the production of these dirty products will be hit financially, as will their investors.
For example, Norway recently announced that it will divest $900 billion from coal; diversifying into Green Bonds gives fund managers a clear way to mitigate this risk.
This is making waves in the finance community, reports Bloomberg.
Unfortunately, because the industry is fairly new, it can be difficult to know just how “clean” Green Bonds really are. Industry standards are still evolving, and transparency is voluntary. Many companies adopt a “Trust us” attitude, like Toyota did when it issued $1.75 billion of Green Bonds to finance zero-emission cars, reported The Economist.
Some might become wary of corporate Green Bonds issued by companies whose practices might be less than environmentally safe. In this case, investors might look for alternatives to simply buying Green Bonds, hoping for a more hands-on investment product.
Sunvestment Group is one such company differentiating itself through the creation of Community-PPA investment opportunities.
By offering community members the opportunity to loan money to local institutions looking to fund their own solar installations, Sunvestment Group has created a smaller-scale debt purchase with the same benefits as a Green Bond, but with fewer questions as to the environmental authenticity of the investment. Sunvestment Group’s Debt Investor class essentially become bond owners, typically earning between 4-6% per year over terms of 5-10 years. Furthermore, bonds, or debt investments, with a fixed-income structure and regular coupon payments, are attractive for those investors looking for more stability and regular cash flow.
If you’re interested in learning more about community-sourced funding, Community PPAs, or the type of investment that might suit you, contact us! You can also read more about Green Bonds on the GoGreen Bonds website and check out these cool graphs illustrating the growth and changes in the Green Bond market.