The future of green bonds is bright

Green bonds—used to fund environmental projects—are getting a lot of attention from investors and environmentalists, says TD Economics.

Environmental initiatives have a desperate need for capital, and governments around the world don’t have the money to fund them all. This week the Ontario government announced it plans to pass a law allowing it to issue its own green bonds. The money raised will be used on overdue infrastructure projects, like extending public transit.

Read: Green bonds to bring Ontario transit to life

While similar in many ways to traditional bonds issued for general corporate use, green bonds differ in that they are monitored to ensure funds are being used to exclusively support environmental projects. This monitoring process is transparent and made available to investors.

Investor profile

Institutional investors – such as pension funds, mutual funds, insurance companies and sovereign wealth funds – are the natural market for green bonds. They hold about 72% of long-term investments in the global bond market, and have significant portfolio requirements for fixed-income investments.

But green bonds have a broad appeal too, though on a smaller scale, with retail investors who have indirect exposure to bonds through pension and mutual fund holdings.

And some green bonds issued abroad have experienced demand from households. A World Bank issue of green bonds was targeted specifically at Japanese individual investors.

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Future potential

The outlook for green bonds is very promising. Demand for green bonds is significant and has been growing quickly over the past six years. Current estimates place the value of the green bonds market between US$10 billion to $346 billion. There’s no standard definition, format or project-type for green bonds, making assessing their market presence problematic. Even using the broadest definition, the green bond is small today but has great room to grow.

The bonds are also low risk investments because they’re issued with strong credit ratings and they often generate a higher return than traditional benchmark bonds.

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Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.