Green bonds: meeting the rising demand for environmental investment goals
Bonds are well-established debt instruments issued to raise funds for projects or to repay existing loans, typically used by corporates or governments. The funds come from investors and this is seen as a safer type of investment compared to equities since they are a form of fixed-income securities.
In order to fund environmental and sustainability initiatives such as projects focused on renewable energy or emission reduction, a new type of bond was developed. Known as ‘green bonds’, these are typically issued by multilateral agencies such as the World Bank, and the International Monetary Fund (IMF).
However, interest offered by green bonds tends to be lower than commercial bonds because issuers usually receive government support and sponsorship. Although yielding lower returns, these bonds are considered less risky than commercial bonds as repayments are underwritten by the issuer, and not dependent on the success of its underlying project.
Green bonds are therefore considered safe, long-term investments and play a defensive role in a portfolio.
The first green bond was issued eight years ago by the World Bank and SEB, a North European financial group. This bond offered investors an opportunity to participate in projects seeking to mitigate climate change and funds raised were used for hydroelectric power plants and ecologically sustainable farms.
Green bonds have grown in popularity as a funding avenue for sustainability projects and associated technologies. New green bonds have been issued around the world to meet the rising demand from institutional investors with environmental investment goals.
The green bond market was valued at US$3 billion (S$4.11 billion) in 2012 and recently, Bloomberg New Energy Finance estimates green bonds issues to hit US$37 billion (S$50.68 billion) this year.
The first Asia Pacific Green Bond, issued by the Export-Import Bank of Korea in 2014, was listed on the Singaporean Stock Exchange (SGX). Proceeds from this bond financed climate friendly projects.
Despite the slowdown in green bond issue in the second quarter of this year, the outlook for these bonds remains bright on the back of an anticipated increase in governmental support. For example, China’s environmental policy is expected to cost 2 trillion yuan (S$452 billion) a year and the Chinese government is likely to obtain funding by issuing green bonds.
Singapore is the favoured destination for green bond issuers from China, Australia and India. Chinese carmaker, Geely, chose Singapore to issue its US$400 million (S$548 million) green bond and Anstock II Ltd and Stockland Trust Management Ltd have also listed their first green bonds on the SGX.
So, if you’re looking to indirectly help save the world, it’s time to call up your broker and get investing in these bonds.