Investors are pouring money into environmental, social & governance and green bonds. Green bond issuance alone is expected to reach up to $1 trillion as early as this year. But all the noise can make it hard for impact investors to distinguish between the useful and the dubious.
Thanks to a lack of standards, the market is rife with “green” bonds issued from corporations that are not green companies (e.g., banks, oil and gas companies, etc.), or debt and equity funds that own stock in those companies and call themselves sustainable.
Investors may be investing in a green bond earmarked for initiatives that are part of a company’s normal course of business, like a utility’s grid modernization project. Or a sustainability bond largely devoted to refinancing debt from previous eco initiatives.
The fact is, the bulk of labeled green bonds and ESG ETFs finance general corporate businesses. While they may make for good marketing, they often don’t do enough to really move the needle.
The alternative: direct, climate-focused investments.
Investment strategies do exist that can directly address climate change – rather than the companies who are often part of the problem. They range from fixed-income strategies and municipal bonds to direct debt or equity ownership in renewable energy companies and projects.
One example is Blue Forest Conservation. The nonprofit collaborates with academic institutions and other nonprofits to evaluate restoration projects and offer climate-focused fixed-income investment strategies.
The goal, as Blue Forest’s co-founder Nick Wobbrock has said, is to “make it look as boring as possible” by mimicking the simplicity of an infrastructure or mortgage investment. That means standardized, uniform loans repaid by multiple sources over time, with blended money (and risk-sharing) from local, state, and federal governments and utilities. The risk/return profiles are comparable to other fixed-income strategies and green and sustainability bonds.
Blue Forest’s Forest Resilience Bond deploys private capital to finance forest restorations on private and public lands. Investors put money in a special purpose vehicle (SPV) that supports the Forest Resilience Fund, which in turn funds implementation partners who do work on the ground (forest thinning, prescribed fire practices, etc.) to reduce wildfires and protect and enhance the ecosystem. The beneficiaries of those services – water and electric utilities, insurance companies with fire risk exposure, local and state governments – then pay back the SPV over time, and thereby the investors.
The model provides scale for these solutions and accelerates investments in the pipeline. In California, RBC GAM has invested in similar projects funding small businesses specializing in landscape and water conservation; the State Water Project, aimed at delivering water to areas of need throughout the state; and numerous other initiatives. Monterey One Water recycles wastewater into drinking water across Northern California.
There are other models for direct investment.
Municipal bonds can help finance a wide variety of local sustainability efforts, such as San Jose-based East Side High School District’s solar power program. The 7.1 megawatt system has eliminated over 23,300 metric tons of carbon dioxide emissions and provides renewable energy career experience and education to the local San Jose community.
Debt or equity investments can also be made directly into renewable energy projects, like Monterey One Water, which aims to recycle wastewater into drinking water across Northern California. Investors can look to funds that own bonds financing these projects or private equity funds that exclusively finance these types of solutions as well.
Targeted investments also have another benefit: the more direct your impact, the more our most vulnerable populations benefit.
When you invest directly in climate-focused projects – especially in targeted local communities – you’re also more likely to support the low-to-moderate (LMI) individuals who are hit hardest by the effects of climate change.
As the Fourth National Climate Assessment report illustrates, inequalities related to health conditions, exposure to environmental hazards, and resiliency to national disasters will only be exacerbated by climate change. In other words, climate risks threaten to trap LMI communities in a cycle of instability.
“Areas that are facing extreme shortages of affordable housing units are also extremely vulnerable to coastal flooding, hurricanes, extreme heat, earthquakes, and fire,” said Laurie Schoeman, National Director, Resilience and Disaster Recovery, at Enterprise Community Partners, in a recent briefing. Case in point: 400,000 federally subsidized homes reside in a floodplain.
The more targeted and direct we can be with our impact investments, the better we can address climate change and support the most vulnerable among us. But pouring more money into generic green bonds is not the same as driving transformative change. To maximize our full impact investing potential, investors need to sift through the green finance noise and ensure their dollars go towards the most meaningful solutions.
Brian Svendahl co-leads the fixed income research, trading and portfolio management team at RBC GAM. In addition to shaping investment strategy, he has been lead portfolio manager for the firm’s Impact Investing strategies since 2006 along with many government and mortgage strategies.