Kingsmill's Investment Miscellanea: Friday, October 9, 2020

Oct 09, 2020 | Joshua Kingsmill


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Key Takeaways

  • Green bonds have grown in significance, now a 1 trillion dollar market
  • Green bonds are also proving to be a good investment
  • As the performance and shifts in investor sentiment converge, this trend will only continue

One of the themes I have discussed in the past is the interest that younger generations have with the environment and the implications of different sectors of the investment market (Link). To be sure, the election in the U.S. has highlighted somewhat this push towards an interest in green investing as a way to create net new jobs and grow the economy

Therefore, it was a fascinating headline to read that so-called “Green Bonds” have passed their biggest milestone yet, with more than $1 trillion issues. These green bonds are the longest standing and most heavily used instrument in the sustainable debt market, offering a range of financing with environmental and social benefits.

More than $200 billion worth of green bonds – which are used to finance the pursuit of environmental projects and activities, from wind farms to wastewater management – have been issued in 2020 thus far. One of the biggest boosters this September came from Germany. The federal government issued a 6.5 billion-euro ($7.7 billion) sovereign bond at the start of the month, making it this year’s biggest single new green bond. Similarly, the Swedish government and Électricité de France helped jumpstart the month, with more than $5 billion combined.

Clearly, this integration of environmental, social and governance criteria has never been more important for investors. This is reflected in the debt market, and it is not only likely that these varieties of financing will grow in volumes in the coming years, but we will see further innovation. As technology continues to improve efficiencies in all kinds of environmentally friendly initiatives, investment dollars will increasingly flow into these ventures.

Ultimately, however, all investments have to stand on their own merit. As this green market matures and evolves, it is clear that these green bonds are attracting investment based on merit in terms of risk-return. A trillion dollars of bond issuance isn’t the result of benevolent investors, who are willing to sacrifice returns to be green:

Global Cumulative “Green Bond” Issuance ($ billion):

Global Cumulative

 

Below, the graph suggests why this trend is really only starting. The issuance of these green bonds is now significant sources of capital, out-perform traditional bonds. For a growing group of investors, coupled with this shift in generational attitudes that are increasingly attuned to the environment, there are more opportunities to put invest money with conviction and returns in sectors that matter:

Green on Top Chart

I’m predicting that the following recommendation still won’t be followed this fall in the spirit of being environmentally friendly. “When are you going to rake the leaves” is a common refrain this time of the year. One could try arguing that The Nature Conservancy of Canada recommends leaving leaves on the ground. I’m not sure many will buy it, but there is merit to this bio-friendly non-compliance (Link) of the annual rite of passage of raking up leaves to make lawns look nice.