OPINION| Green Bonds are Green Flags
- Hazel Kaye Arevalo
- Jul 23, 2022
- 3 min read
Green bonds are good investments. Green bonds function the same as other types of bonds, wherein borrowers issue debt securities to raise investors' money in exchange for steady income streams through interest payments in a certain period.
“Imagine a life with lots of money but no available resources to spend it.”
Inflation is soaring, and many have proven that its disadvantages can be conquered through investing, a preparation for a future with a higher cost of living. However, is there an abundant life ahead? Will an enormous amount of money still matter if the world is transitioning into a world with scarce resources?
We are alarmingly close to an environmental catastrophe, close enough for a NASA Scientist to chain himself and protest against global warming in front of a bank that largely financed fossil fuels operations. Climate change impacts financial markets. Investors, as crucial players, can initiate a measure to support sustainability goals towards a livable future through green bonds.
Green bonds function the same as other types of bonds, wherein borrowers issue debt securities to raise investors' money in exchange for steady income streams through interest payments in a certain period. Green bonds' distinctness lies with the projects being financed, such as energy efficiency projects, Renewable energy projects, Pollution prevention, and control projects, Natural resources and land management projects, Clean transportation projects, Wastewater and water management projects, Green building projects (CFI Team, 2021)
Despite the challenges faced by the name “Green Bonds”, actions still speak louder than words. You might consider the green flags of green bonds below:
1. Purposeful
Following the Paris Agreement, the international climate change treaty aims to limit global warming to well below 2°C and pursue efforts to limit it to 1.5°C (European Commission). Investing in green bonds supports companies' drive to do projects out of renewable energy to help achieve the Paris Agreement's goals in preventing climate change threats.
2. Kill two birds with one stone
Investment in green bonds allows investors to achieve the intention to generate environmental impact alongside a financial return. The World Bank has been witnessing investors’ changing attitudes towards sustainable investing. There has been an explosive growth of green bonds in capital markets. According to the Climate Bonds Initiative, annual issuance may reach $1 trillion by 2023. (Akshit, 2021). Thus, this positive imposition can be a projection of capital gains in the future.
3. Friendly
Green bonds may be tax-friendly because they may include tax benefits and credits, making them a more appealing investment than a comparable taxable bond. (Segal, 2022) Bondholders may not have to pay income taxes on interest earned on green bonds, allowing the issuer to negotiate lower interest rates or minimize the actual amount of tax required.
4. Proactive
Investing in green bonds might avoid a long duration of red in the investment portfolio due to the fatal impacts of climate change if everyone can successfully preserve the planet now. Green bonds respond in the now rather than replying to it after catastrophes happen.
“Climate Risks are Investment Risks” (Fink, 2021). Investments can be impacted by climate risk through:
Financial Risk - Adverse weather conditions can cause physical damage to real estate and accompanying infrastructure, affecting building access and operations, rental demand, repair costs, and asset value (Sit & Johnson, 2021)
Reputational Risk - Investors are becoming climate literate. Investment managers seen as not taking action on climate change can also face reputational risk that may undermine asset business models (Sit & Johnson, 2021).
We can have all the money in the world, but no one could ever buy another planet to replace Earth. Investors provoke companies’ growth, expansion, and investment decisions. Thus, sparing little to help companies finance environmental projects is much more potent than tolerance of inaction.
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