I’ve written before about recent developments in fixed income sustainable investing, such as the increasing availability of ESG-focused bond indexes. Today I want to talk about a lesser known segment of the sustainable market: green bonds.  And once again I wanted to invite in one of BlackRock’s experts to help me explain the topic.  Please join me in welcoming Ashley Schulten , BlackRock’s Head of Responsible Investing for Global Fixed Income.

Matt: To get us started, can you tell us what a green bond is?  I assume it’s not a bond contract written on recycled paper!

Ashley: No, it’s not about the paper!  A green bond is a debt instrument in which the issuer commits to using the borrowed money for projects deemed environmentally beneficial. These can include everything from installing solar panels at factories to improving energy efficiency to constructing green buildings.  The key is that the bond’s proceeds are ring-fenced on the issuer’s balance sheet to finance these green projects, so investors know that the money being raised is only going to go to the green projects outlined by the issuer.  Importantly, a green bond doesn’t have to be issued by a green company, per se. BGRN pie FInal 

Chart represents the global market of labeled green bonds.

Matt: Sounds like an interesting option for those investors focused on the environment. Is this a new market? How big is it?

Ashley: The market has actually been around for more than a decade, but has really taken off over the last four years.  Today there are almost $475 billion in green bonds outstanding, with over $150 billion issued in 2017 alone (source: BlackRock, Bloomberg, as of 6/30/2018). That market is global and spread across a range of public and corporate issuers. [storytout] Read more about Sustainable investing . [/storytout]

Matt:Wow, that’s a significant trend. How should investors think about green bonds from a portfolio perspective?

Ashley: As you said earlier, green bonds may appeal to investors focused on the environment.  More specifically, they offer investors the ability to pair their financial and environmental objectives. Investors can still access the bond market as a way of seeking income and adding diversification in a broad portfolio.  At the same time, they can know that their investment will go towards funding projects designed to address climate and other environmental issues.

Matt: Those new to sustainable investing may be confused about the differences between green bonds and ESG investing.  Can you break it down for us?

Ashley: As I mentioned, a bond is deemed “green” based on what the issuer will use the money to fund.  If the use meets specific structuring and environmental criteria, then the issue can qualify as a green bond. ESG, meanwhile, is a measure of the Environmental, Social, and Governance aspects of a bond issuer. ESG ratings are applied to a company as a whole, and thus impact all of that company’s debt. Every bond issuer can be assigned an ESG rating if the information to do so is available. Green bonds are a related concept, but different in that they are uniquely focused on what the issuer is funding.

Matt: Where might an investor put green bonds in their portfolio?

Ashley: We typically see investors using green bonds as a substitute for government or corporate bonds. For example, an investor who had a 10% allocation to global bonds might take half of that exposure and place it into a green bond investment. This would preserve the investor’s global bond allocation, while increasing the environmental impact of the overall portfolio.

Matt: All right, final question. How can investors access the green bond market today?

Ashley: That’s one of the most exciting developments that we’re seeing in this market today: as issuance has grown so has the availability of diversified investment options. For example, iShares just launched the iShares Global Green Bond ETF ( BGRN ) . The issuers in this global market are generally investment grade. Although the fund seeks to track an index of global investment grade bonds, hedges are used to mitigate foreign currency risk.  Additionally, for investors who want to get a sense of how “green” their investments really are, green bond issuers offer publicly disclosed reporting on the impact of their projects, like the amount of CO2 reduced. Fund investors can likewise see the “greenness” of the overall portfolio alongside other data.

Matt: That sounds like an exciting new option for investors to consider. Ashley, thank you for your time.

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