Sustainability 2 - ADOBE
Sustainability

Sustainable Bonds and the Rise of Generation Green

The appetite for investment vehicles linked to social goals has driven a skyrocketing demand for green bonds and ETFs.

Your money is always consciously or unconsciously generating something.

That’s the word from Peta Kelly, a millennial writer and influencer. A young multi-millionaire herself, she’s especially mindful of the way her money is used.

And she’s part of an impressive cohort. In fact, by July 2019, millennials had surpassed baby boomers as the nation’s largest living adult generation, according to population estimates from the U.S. Census Bureau. There’s an ongoing debate over whether they are better or worse off financially than the previous generation, but one thing is clear. How they invest will have a huge impact on the economy—and on the wellbeing of the planet.

That’s a responsibility they take seriously. Growing up under the shadow of climate change, millennials have become all too aware of the need to bring this existential threat—and other ills facing the world—under control. So when it comes to investing, they’re exhibiting a profound social conscience by holding out for initiatives that reflect their values. The evidence is unassailable: A 2019 Morgan Stanley survey found that 90 percent of millennials named impact investing as their most important criteria when deciding where to place their cash.

This appetite for investment vehicles linked to social goals has driven a skyrocketing demand for green bonds and ETFs. In fact, the market for these products is so hot that it’s hard to remember that the first green bond was issued just 13 years ago. The impetus at the time was the UN’s 2007 Intergovernmental Panel on Climate Change (IPCC) report. The document was full of dire warnings about rapidly accelerating occurrences of droughts, heatwaves, floods and cyclones around the globe.

The managers of a Swedish pension fund took the grim forecast to heart. They began looking for a way to safely invest in climate change mitigation. They approached their bank, which in turn sought advice from the World Bank, an organization with a long history of environmental financing. The Centre for International Climate and Environmental Research (CICERO) was brought on board, too, to offer its credibility and expertise.

This team of mavericks devised a goal that was elegant in its simplicity. Their objective: Raise capital for projects that measurably exhibit environmental benefits and that ideally deliver decent returns for investors. In 2008, the group achieved that goal and issued the Scandinavian pension fund managers a SEK 2.3 billion bond (about USD 3.9 million at the time) with a maturity of six years. Green bonds—that is, investment instruments that spawn positive, measurable environmental impact as well as a financial return—were born.

By 2012, private corporations, recognizing the opportunity to do good and do well, were getting in on the act. A consortium of investment bankers further refined the definition of green projects. The Green Bond Principles, voluntary guidelines they created in 2014 (since updated in 2018), encourage transparency, disclosure and integrity based on four clarifying fundamentals:

  • How proceeds are used
  • How projects are evaluated and selected
  • How proceeds are managed
  • How to report on the use of proceeds and the impact generated

The rest, as they say, is history. Increasingly stringent standards for green bonds helped turbocharge the field, and in 2014, the annual issuance of the instruments tripled to reach USD 36.3 billion. Today, independent evaluators routinely conduct external reviews before a bond is designated green. Proceeds from the bonds are carefully tracked and managed, with issuers typically providing highly detailed reports on the impact and assets of their projects. Now this kind of investing is expanding to fund a broader range of social and sustainability projects, such as low-income housing and small-business cooperatives.

With investor confidence on the rise, momentum is pushing demand for socially positive investment products into the stratosphere. Even COVID-19 hasn’t stopped this juggernaut. Despite the pandemic—or possibly because of inequities it brought to light—green bond issuance reached a record-breaking USD 269.5 billion by December 2020.

Millennials like Peta Kelly aren’t the only ones putting their money where their mouth is. But they have certainly helped spur a progressive investing environment.

Sustainability 6 - ADOBE

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