Rosalie Vendette | Desjardins Group
With Earth Day coming up on April 22, it's a great time to tell you about green bonds, a market that's exploded in the last few years with investors who are concerned about the environment.
More and more responsible investors, as well as traditional ones, are looking for investments that encourage a transition to a greener economy. Many people believe that green bonds are a way to achieve that goal. So, what are they all about?
The ABCs of bonds
If you have a project that needs financing, you can get a loan from your financial institution. When governments or companies need to borrow a lot of money, they issue bonds.
If you hold a bond, you've loaned money to an entity. In exchange for the loan, you receive interest.
Bonds usually make up a significant portion of a portfolio's fixed income, since they're associated with debt securities whose value and returns fluctuate less than those of company equities.
And the "green" in all that?
Green bonds were first launched in 2007, but the market didn't start to take shape until 2012. The difference? The funds raised were used to fund environmental projects.
Green bonds generally offer the same returns as traditional bonds, but they have added environmental value and different requirements for reporting.
To enhance the credibility of the process, the added value evaluation and the reporting are generally done by external third parties. In addition to returns on par with those of conventional bonds, green bonds allow for positive environmental performance.
How are they standardized?
As is often the case in expanding markets, structuring and standardization come into play, and green bonds are no exception. It's reassuring to know that voluntary process guidelines for transparency and reporting--the Green Bond Principles--have been developed by the International Capital Market Association.
The Climate Bonds Initiative has been tracking the green-labelled market since 2009. Many governments, like China's, have also established regulatory frameworks. There are also green bonds that aren't labelled or subject to principles, but include similar and desirable characteristics.
The green bond market is definitely one to watch, because green investments are fully in line with the transition to a low-carbon economy.