What to Know About Green Bonds

MICUK 2021: Green bonds are a growing area for sustainable investors and income-seekers, says DBRS analyst Gordon Kerr

Holly Black 30 June, 2021 | 10:23AM
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Holly Black: Welcome to Morningstar. I'm Holly Black. With me is Gordon Kerr from ratings agency DBRS. Hello.

Gordon Kerr: Hello.

Black: So, Gordon, you've been looking at green bonds. What should be a simple question, but probably isn't. First off, what is a green bond?

Kerr: Well, there are several types of green bonds. But the most common type is what's referred to as a use of proceeds. Green bond where government or issuer, a company will commit to using the proceeds from the bond funding raise, to commit to green projects either through offering further on lending to green projects or committing to investment into green projects. So the funds that have been raised in the bond sale are dedicated to be used towards green projects.

Black: And that's really great for sustainably minded investors who want to know their money is being used on certain activities. What are some other reasons you would hold a green bond in your investment portfolio?

Kerr: I mean, I think there's -- there are many personal reasons why you may want to hold a green bond just from making you feel good as an investment side of things. But also just diversification, it offers you an opportunity to explore other types of investments that give you a greater diversity across your portfolio.

Black: And one of the fears I think that people have with this type of investment is greenwashing. What are some of the risks with investing in green bonds?

Kerr: So greenwashing is a concern, it's something that has come up recently. So, people looking at things being labelled green that may not quite be as green as, as suggested. However, I think, given the way that the markets developing in terms of what are referred to as rating agencies, our sister company Sustainalytics is one of those involved, making sure that you are comfortable with the agency that's providing that green label if you like. And making sure that it is something that's verified through the processes and not being simply just stuck on and not followed up and not maintained in terms of monitoring whether or not those proceeds go towards green investments.

Black: And obviously, a main reason that investors would choose a bond is for the income. Are green bonds a good source of a decent yield?

Kerr: Green bonds used to offer a little bit higher yield than other types of investments, but given their demand and given the fact that a lot of the projects have been quite successful with regards to the green investments, they've narrowed that gap. And so as a result, tend to actually price on top of and in some cases even tighter than some of the other investments, but they still tend to offer a good quality in terms of credit quality, in comparison to other types of investments.

Black: Fantastic. Gordon, thank you so much for your time. For Morningstar I'm Holly Black.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Holly Black  is Senior Editor, Morningstar.co.uk


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