By Thomas Kostigen
Investors would be wise to follow the money flows from green bonds. The sectors in which billions of dollars, which are record amounts, are being singled out can be prime tells to follow for opportunities.
As I wrote in last week’s column, green bonds are seeing new heights of issuance by countries (sovereign bonds), companies (corporate bonds), and municipalities (muni bonds). Yearly issuance for the lot has grown severalfold since 2015, with forecasts for the market to grow exponentially more over the coming years to eclipse $1 trillion.
Bonds are riding the tide of the global green energy transition and the push on infrastructure spending by the Biden administration. All this money has to go somewhere. And according to the US Green Bond Review, the use of proceeds from new bond issuance last year is mostly aimed at the energy sector, which took 35 percent of the total green bond spend. Buildings were next in line, receiving 26 percent, transportation got 24 percent, water seven percent, waste two percent, land use five percent, industry one percent, and the remainder was for tax credits and other uses.
Investors can draft these investments and find targets that may benefit from big dollar, green bond spending. A good financial advisor can also help to figure which target companies may reap the most rewards from green bond issuance. After all, bonds disclose what and where they are investing. The dollars wouldn’t be too hard to track.
Another option for green investors is to play both the bond market and the stock market, allowing the different asset classes to complement one another. The green bond market has been growing at a whopping 60 percent per year since 2015. While it may not always lead to superior gains, the idea of following the money in the bond market may be a smart play for green equity investors.
Something else to track is federal green bond issuance. This is something the Green Bond Review says could highlight the big push the US is making in the climate change sector and help to lead the charge for other countries. “With a new administration in the White House, the United States has emerged from its environmental hibernation. President Biden is leading a brisk reawakening with ambitious plans on climate change. At the same time, the continuing global pandemic has spawned an urgent demand for new financing ideas. So, what about a green bond issue by the U.S. Treasury?” it asks.
That would certainly send a clear, global message about climate leadership. Moreover, this could insert the weight of the Federal Reserve Board into the climate finance space. It might also serve as impetus for more and better standards. “Investors and companies are under pressure to demonstrate that projects and target investments labeled ‘green’ actually hold up to green standards and meet environmental objectives,” the Green Bond Review says.
This is an important point for retail investors to consider with any of their potential investments. Frameworks, certifications, and guidelines are a big part of the due diligence process when vetting an investment for its green credentials. Indeed, many companies have been accused of greenwashing. Next week we’ll look at the frameworks, guidelines, and certifications that matter most when it comes to green investing.
Thomas Kostigen is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Thomas is a best-selling author and longtime journalist who writes about environmental, social, and governance issues.