(This is the first post about Green Fund investing, providing an explanation of “green” investing, and how it fits with Quaker principles. A second post on the specifics of Friends Fiduciary’s Quaker Green Fund will be posted in part 2. The text in these posts comes from the most recent Friends Fiduciary newsletter. Re-published with permission.)
FUNDING A GREENER FUTURE
Quakers have always known the importance of putting our money where our values are. At Friends Fiduciary, investing according to Quaker principles involves not only avoiding those companies, products and services that are inconsistent with our principles, but also seeking opportunities to actively support companies and initiatives that reflect our values. We begin our investment process by focusing on companies that are beneficial to society and have better environmental, social and governance (ESG) profiles in their respective sectors. We are enthusiastic about a fairly new, small but growing security class that offers the opportunity to invest affirmatively in projects designed to mitigate climate change.
When it comes to directly funding initiatives that further our values, ‘green bonds’ are one of the most effective and efficient options available. We are expanding our holdings of these securities and are excited to put them to work for our constituents. Chosen carefully, green bonds not only support global climate-change goals, they also provide attractive returns and portfolio diversification benefits.
What are green bonds?
The phrase ‘green bonds’ is gaining currency among institutional investors, but is still loosely defined. Bonds are fixed-income securities: debt, or an IOU, issued by a company or government with a promise to repay the capital with a defined amount of interest. ‘Green,’ however, has myriad definitions according to a specific investor’s perspective. At Friends Fiduciary, we are focused on bonds that fund projects designed to provide climate change solutions.
Our interest in green bonds mirrors growing interest from the broader investor community. In early 2014, the investor-advocacy group Ceres, working with global investment banks, advanced a set of voluntary guidelines known as the Green Bond Principles. They were designed to increase transparency in the marketplace, and to support organizations that are interested in issuing green bonds. Also in 2014, Barclays MSCI, a well-regarded and broadly-followed provider of fixed income indices, began offering its Barclays MSCI Green Bond Index, further validating green bonds as a distinct investable asset class.
With initiatives like these and the interest of investors like Friends Fiduciary and our constituents, issuance of green bonds is increasing rapidly. The Climate Bonds Initiative estimates that organizations issued a total of $36 billion in green bonds in 2014, an increase of over 300% from $11 billion in 2013. They predict a similar pace of growth in 2015, estimating total global issuance of $100 billion this year. While that is a tiny percentage of the $80 trillion broad bond market, the size and growth of the market are encouraging public and private-sector participants to consider new issuances to fund green initiatives.
Why green bonds?
Despite the strong growth in green bond issuance, Ceres estimates that an additional $44 trillion of investment in clean energy will be necessary to limit global warming to a 2°C rise. While the temperature target is subject to some controversy, the core premise is not: the global community needs to commit dramatically more investment dollars to combating climate change. Green bonds are an excellent means to do so.
One reason is that bonds are easier to issue than stock. Many organizations that cannot issue stock, including cities and states, private companies and small start-ups, can issue debt offerings. The issuer needs to provide detailed financial information and appropriate reporting to investors, but does not bear as great an ongoing regulatory burden as it would with stock. Therefore, green bonds can be an efficient means of raising funds for climate-related projects for a wide variety of entities. As an example, one early green-bond initiative was a 2001 security offered by the city of San Francisco, raising $100 million to implement solar and wind-energy generation. Other cities and states, as well as global development banks, government agencies and corporations, have issued green bonds more recently, including the Commonwealth of Pennsylvania, the University of Akron, the World Bank, the African Development Bank, SolarCity and Unilever to name a few.
Green bonds enable investors to target their funding. While conventional fixed-income securities are often earmarked for “general corporate purposes” or other broadly-defined programs, green bonds have specific objectives in raising funds for environmentally beneficial projects, as in the San Francisco example above. While some projects are very general, at Friends Fiduciary we are seeking and purchasing bonds that generate funds specifically for climate-change mitigation.
Bonds as a class are a necessary part of a balanced portfolio, providing risk diversification and broad exposure to a range of corporate and government issuers. We often engage with stock issuers to advocate for the causes and values important to us and our constituents. We have fewer opportunities to do this with our fixed income investments, but with green bonds we have the opportunity to advocate directly, with dollars, for solutions to climate change challenges.
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