A growing percentage of people today are not solely concerned about outsized returns when they invest their money. They also care about the social impact of their investments.
That increased interest has in part spurred the growth of socially responsible investment products and “impact investing” on Wall Street.
The growth of so-called green bonds is a part of this trend.
“Investor appetite for environmental solutions has increased sharply in recent years, with $US21.4 trillion in global assets incorporating socially responsible investing, and up to 93% of US Millennials showing a high preference for impact investing,” Bank of America Merrill Lynch said in a recent report.
Issuers of such bonds, which include governments and companies, promise to use the proceeds on environmentally friendly projects. Those investors can use the money from those bonds to finance renewable energy projects, clean auto technology, and a number of other green initiatives.
Earlier this year, the green bond market passed a milestone, with $US200 billion in total issuance since the inception of the market. There could be an additional $US150 billion worth of issuance in 2017, according to a note out March 28 by a group of Bank of America Merrill Lynch equity strategists led by Beijia Ma. Ma wrote that the recent swell in the market was driven by a sharp increase in the number of bonds issued by national governments.
A Boom in green bonds
According to the bank, the boom of green bonds in 2016 is directly linked to the 2015 international Paris climate agreement and subsequent targets set by nations. Many countries saw (and continue to see) green bonds as a means to hit said targets and lower their carbon footprint to comply with new standards.
The bank said:
“2016 was a transformational year in global policy for green bond development, with China’s remarkable rise a clear illustration of the impact of supportive legislation. Countries crystalize their climate commitments in 2017, with Poland (first mover) and France ($US7 billion note, largest ever) issuing their inaugural sovereign green bonds in the past quarter.”
The bank believes an additional five to 10 nations will jump on the green bond bandwagon later this year, further contributing to the growth of the market. The bank predicts that China will lead the way in green bond issuance next year. According to the note, China, the nation responsible for over 30% of the world’s CO2 emissions, could see their green bond market grow by up to 50%.
“We project $US90-$US130 billion of issuances in 2017 … which assumes 30%-50% growth from China, and 15% growth from the rest of the world.”
That estimate is also contingent upon high growth in other emerging markets such as Latin America and Africa.
Currently, the US has the highest number of outstanding green bonds.
What’s next for green bonds?
Nigeria is the next country in line to issue green bonds, according to the bank, as the nation has already completed “intensive work” and is aiming for a March or April launch.
Bank of America also thinks we could see further diversification in the green bond market. According to the bank the mortgage industry could soon witness a pop in “green mortgage backed securities.”
“Fannie Mae believes these types of green renovations could lower credit risk, increase property value, create higher quality and more durable housing, while lowering energy and water use,” the bank said.
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