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Almost a decade ago, the term “green bonds” meant very little—even for many financial market specialists. Now such bonds are a significant and growing business. That's especially true for people interested in so-called impact investing, or making investments that have a positive and measurable social or environmental impact on the world.

Green bonds are fixed-income securities sold by corporations and other entities with the sole purpose of using the funds raised for environmentally sound projects (for example constructing more energy-efficient buildings or setting up windmills to generate electricity).

While the market started small, it's grown quickly. “The demand from investors continues to increase,” says Sarah Thompson, director of sustainable finance at RBC Capital Markets. “We're seeing a demand and supply imbalance.” The growth of the sector has been rapid over the last decade, according to the UK-based Climate Bonds Initiative, which tracks the data and also helps determine whether securities qualify for “green” status or not.

Popular green bond sector still growing

Green bond sales are expected to reach US$350 billion in 2020, up from a paltry US$1.3 billion in 2011, according to projections from the Climate Bonds Initiative.

The demand for such investments comes from a variety of sources. Some investment funds are dedicated to investing using ESG (environmental, sustainability and governance) principles. For them, green bonds are an obvious choice. “Investors know that the funds [money] will get used for sustainable projects,” Thompson says. Of course, there are other investors who buy green bonds solely because the financials look attractive—just as they would with any other fixed-income security, she says.

Green-savvy companies often more profitable

In the past, there was a belief that sustainable investing meant sacrificing some financial return. That view is now outdated, Thompson says. There is increasing evidence to show that companies that take ESG issues seriously tend to perform better financially, than otherwise similar companies. “They're generally more profitable and have better access to capital,” she says. “They're likely to manage risks and take advantage of the opportunities better.” The focus on doing the right thing permeates the organisation far beyond any focus on green or other sustainable projects. And Thompson says high-net-worth individuals (HNWIs) draw the same conclusions “that companies with a strong ESG commitment make better investments than do other firms.”

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While part of the benefit of investing in green bonds is that they tend to be issued by financially sound companies, there are other reasons to invest as well. A majority of investors who buy these bonds tend to hold them for a long period of time, says Mansoor Khan, director of debt capital markets at RBC. They're known as “buy-and-hold investors, and that means there are fewer green bonds available to buy on the open market.” In general, when supply is lower than demand, prices remain firm or increase. “There's an enormous amount of interest from ESG funds and these bonds fit their mandate well,” he says.

Green investing compatible with impact investing

For impact investors, the most important thing is knowing they've put their money somewhere with a measurable and positive effect. This is where green bonds are especially attractive in part because the Climate Bonds Initiative analyses which bond issues qualify as green bonds. “This market is all about transparency,” Khan says. The entire industry encourages companies to be as open as possible about the impact the green bond-funded projects are having.

Khan also notes the level of disclosure provided by companies issuing green bonds is a work in progress. “When it comes down to impact reporting, it comes down to the individual bond issuers,” Khan says. “And that depends on how much information they have available.” As the green bond industry is relatively new, Khan expects what gets disclosed, and in what detail, will be a work in progress. “It's an evolving process that doesn't happen overnight, it happens over time,” he says. RBC has published its own green bondreport detailing the allocation of proceeds from its inaugural green bond issued in April 2019, along with relevant environmental impacts.

“I think as time goes by, there'll be more transparency about being green,” Khan says. And out of that clarity new industry norms will get established. “It's all being done on a best practice basis,” he says. “And the bar is going to be higher for going green [in the future].”

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