Canada’s public pension plan just got a bit greener this month.
The Canadian Pension Plan Investment Board (CPPIB) recently issued $1.5 billion in green bonds to help finance, ”…plans to invest more than $3 billion in renewable energy as it prepares for an expected global transition to a lower-carbon economy.”
A bit of a fiery political debate hit the Twittersphere this week on the merits of this type of investment. As with the growth in impact investing, it is unsurprising that there is a tide that is pushing back on green bonds when billions are on the move.
We’re all green bond investors now. So let’s briefly look at the facts with background on green bonds, including activity, performance, and purpose to help inform the debate.
What are green bonds?
A “green bond” is an investment products created to finance projects that have positive environmental or climate benefits. The capital may provide funding for projects like renewable energy initiatives (wind and solar energy), energy efficiency projects, sustainable water and wastewater management, and/or green buildings. Green bonds may be issued by corporations, financial institutions or governments, from Apple and Toyota to the Government of Ontario and the Commonwealth of Massachusetts and the Government of France to Manulife and TD Bank. There are also smaller green bond offerings offered by specialized intermediaries like CoPower and SolarShare that are available for the general public. (Full disclosure: CoPower and SolarShare are both SVX issuers.)
Although there is no universal standard (which remains a challenge for this type of offering), many institutions are trying to fill this definitional and accountability gap. There are standards for green bonds by third party organizations like the Climate Bonds Initiative, and there are also rigorous internal standards set by issuers like the World Bank. Governments like Japan have also established guidelines, and the European Union will develop a Green Bond standard by 2020.
Major investors and billions of private capital are investing in green bonds.
There is significant momentum in the green bond market. So your pension funds will be invested alongside hundreds of billions of private capital from leading investors. In 2017, over $155 billion in green bonds were issued in the global market. In 2018, the market is expected to grow to $250 billion.
Green bonds have strong financial performance
Green bonds are not a zany scheme and they are not a government subsidized program that will throw your hard-earned pension funds into a coal-burning fire for added heat during the cold, cold winter months. Green bonds generate positive financial returns that meet or exceed the performance of the conventional bond market:
- According to recent research by Morgan Stanley as reported in Forbes, “…since late 2016, green bonds have outperformed their conventional counterparts, both in absolute terms and on a risk-adjusted basis.”
- Recent research from S&P Dow Jones reported that, “…market participants looking to green-up their portfolio (with green bonds) may not need to sacrifice much (and may actually outperform the core).” A quick data run of green bond performance over the past (one) 1 year period shows the S&P Green Bond Index significantly outpacing the traditional index.
- A recent Dutch study from Erasmus University Rotterdam examining a dataset of 359 Green Bonds and 1,291 conventional bonds between 2011 to 2017 found that green bonds outperformed conventional bonds, with increasing significance over time.
As one component of a greater overall strategy, green bonds can diversify our collective investment portfolio with good investments that can meet our fixed income needs. For Canadians, green bond amount and associated investment is a very small percentage of our overall pension plan portfolio (less than 1%).
So green bonds are not subpar, politically correct, or a parody. They are a wise investment choice.
Green bonds are one of the important tools to help us tackle climate change
We need trillions in capital to tackle climate change in order to mitigate the trillions it will cost us if we don’t take action. Leaving aside the tax question for a whole other debate, we won’t be able to mobilize the capital we need solely using the taxation tools, balance sheets, and operating budgets of federal, provincial, and municipal governments. Green bonds can help mobilize additional, critical private capital to augment the necessary regulatory and policy tools of governments we need to tackle climate change. And it is clear they have demonstrable impact in starting to address this pressing local and global problem.
They are one tool to tackle climate change alongside good public policy. We just need to make sure their impact is tracked and reported, ensure they meet useful and reasonable standards, and monitor green bond issuers to ensure they make prudent investments in projects, initiatives, and enterprises.
So green bonds have significant momentum, market leaders, and capital behind them alongside good financial performance, and they are an important tool to help us tackle climate change. Sounds like a reasonable investment for our retirement savings.