What does it take to become a responsible investor in today’s world? Do you think about making moral investment choices in ways that can impact the climate, our environment, or the way we utilize our natural resources?
The Pension Boards interviews Andrew Russell, Director of Fixed-Income Investments, to share how investing in green bonds (bonds specifically earmarked to raise money for climate and environmental projects) is one way Pension Boards’ members can add their footprint to mitigate climate change.
Q: In your opinion, are investors becoming morally sensitive to issues concerning our planet and becoming better stewards?
A: Yes! Concerns about a healthy planet and climate change have been hot button issues for some time, and investors are now embracing these themes more fully. Investors are looking for ways to help. Global fixed-income investors’ interest in green bonds has been growing steadily. Green bond issuance has boomed over the last five years. So far this year, $115 billion of newly-issued green bonds have been sold to investors. Studies by the Climate Bond Initiative show that roughly half of institutional asset owners are now investing in green bonds.
Q: How are investors factoring the environment into their investment portfolios? How are these decisions playing out in the financial markets in terms of performance and returns?
A: Many institutional and retail investors have been eager to learn about green bonds and investor interest has risen. In response to investor demand for green bonds, asset managers have been “greening” their offerings by converting traditional funds into sustainable ones. According to Morningstar, assets under management in funds that abide by environmental, social, and governance (ESG) principles have surpassed $1 trillion. Green bonds are no different than non-green bonds in that they have a specific issuer, a coupon rate, a maturity date, and a credit rating. It is the use of proceeds from the bond issuance being used to finance a green project that makes a green bond green. Over time, green bonds have performed in line with their non-green counterparts with similar risk metrics. The bonus? Green bonds are impactful with no additional risk.
Q: How much of the Pension Boards’ internally-managed fixed-income assets are now sustainable?
A: Currently, $268 million of the Pension Boards’ internally-managed fixed-income investments are sustainable. That’s 36% of the internal total and it is almost evenly split between green and social bonds.
Q: How does buying green bonds help the climate? How does owning these bonds help the Pension Boards?
A: When an investor purchases a green bond, he or she is effectively making a loan to the issuer of the bond. In the case of green bonds, the money raised from the bond issuance is used specifically to finance or refinance projects that are environmentally-friendly in some way, such as providing loans for consumers to buy hybrid or electric cars. Investing in green bonds helps the Pension Boards do its part on behalf of its members in the global effort to raise capital to address climate change.
Q: What is the Pension Boards’ approach to green bond investing? Are their yields and/or returns different from bonds that are not green?
A: The Pension Boards utilizes a four-pronged approached to sustainable investing: 1.) Embrace the United Church of Christ’s 3 Great Loves initiative; 2.) Follow the Pension Boards’ Faith and Finance Policy; 3.) Adhere to Green and Social Bond Principles; and 4.) Incorporate the framework created by the United Nations Sustainable Development Goals. The implementation of this approach is thematic. History suggests that companies and organizations with higher credit ratings have issued more green bonds on average than those that do not. While the long-term returns of green and traditional bonds of similar credit metrics are in line with one another, green bonds, due to their higher credit ratings, outperformed during the COVID-19-related market crisis earlier this year.
Q: Can you offer some examples of the types and variety of green bonds available and tell us how they support the Pension Boards’ Faith and Finance mission?
A: Green bonds support a variety of impactful purposes. Renewable energy, energy efficiency, and green buildings, along with low carbon transport and waste management, are the largest when broken down by category.
The Pension Boards’ Faith and Finance mission is to achieve a double bottom line objective when investing, meaning to “do well” regarding an investment’s return, but also to “do good” for society. Providing capital to help address climate change issues supports the Pension Boards’ Faith and Finance mission.
Among our green bond investments is Owens Corning, which issued its first green bond last year and committed to spending $450 million on sustainability projects related to renewable energy and energy efficiency. Another is LG Chemicals, which uses proceeds from their green bonds to supply electric vehicle battery orders. Eversource Energy manages the number-one ranked energy efficiency program in the nation, as recognized by advocacy organizations including the Coalition for Environmentally Responsible Economies (Ceres) and the American Council for Energy-Efficient Economy. Mid-American Energy provides more than half of Iowa’s customers’ annual energy needs with renewable energy generated by wind farms. The proceeds from Pepsi’s green bond issuance funds projects that purchase compostable, biodegradable, and/or recyclable material for use in product packaging.
Q: How can Pension Boards members know they are investing responsibly or in the right funds? [share about our funds]
A: Members can rest assured that each of the Pension Boards’ funds that invest in fixed income are green and social bonds. These include all five Target Annuitization Date (TAD) Funds, the Balanced Fund, the Bond Fund, the Stable Value Fund, as well as both the participating and basic annuity.