Sustainable Bond Investing

By Andrew Russell, Director of Fixed-Income Investments

Environmental, Social, and Governance (ESG) factors are strongly considered by the Pension Boards as potential investments are evaluated on behalf its members. Notably, fixed-income investments that embody ESG factors are becoming more prevalent in the marketplace as bond issuers, bond underwriters, and bond investors recognize the return and environmental/social impact benefits of sustainable investing.

The Pension Boards places a special emphasis on “sustainability” in its approach to Corporate Social Responsibility, so investing in sustainable bonds is a natural fit. Sustainable bonds are ESG-related, fixed-income securities where the proceeds of a bond’s issuance (the money borrowed by issuers from investors in the form of a bond) will be used exclusively to finance or refinance green, social, or impact projects. They also earn a market rate return. Sustainable bonds are an integral part of the Pension Boards’ fixed-income investment program and are specifically chosen by the Pension Boards’ in-house fixed-income team for their appropriateness and appeal in regard to both its investment and Faith and Finance policy.

Green Bonds
Within the ESG framework, green bonds are the most commonly issued type of sustainable bonds, which aligns nicely with the United Church of Christ’s objective of investing in climate solutions that reduce carbon intensity. Green bond project categories include renewable energy, energy efficiency, pollution prevention and control, clean transportation, sustainable water, wastewater management, green buildings, and others. Green bonds are standard bonds with “Green” as a bonus feature—they offer investors the opportunity to participate in the financing of Green projects that help mitigate climate change.

The Pension Boards, a “Green Bond Principles” Member
In 2017, the Pension Boards became a member of the “Green Bond Principles,” a consortium of investors, underwriters, and bond issuers that are working together in the bond market to promote and support projects with environmental benefits. As of this writing, the Pension Boards has invested nearly $200 million in sustainable bonds, mostly green bonds. Sustainable bond investments are held throughout the Pension Boards’ investment portfolios including the Balanced Fund, the Bond Fund, the Stable Value Fund, Targeted Annuitization Date (TAD) Funds, and both the Participating and Basic Annuities. Importantly, this focus on investments that help address ESG factors has taken place without changing the risk profile of an investment portfolio or sacrificing return. Additionally, Wall Street banks, bond underwriters, and Green Bond issuers recognize the Pension Boards as an investor that is serious
about climate change.

Offer investors the opportunity to participate in the financing of “green” projects that help mitigate climate change.

Some notable Green Bond issuers held by the Pension Boards’ investment portfolio include:

African Development Bank (Waste Management)
Proceeds of this green bond will support the
financing of low-carbon and climate-resilient projects that include climate change mitigation and adaptation projects in the field of renewable energy generation and energy efficiency; biosphere conservation; waste management; fugitive emissions; and carbon capture.

Bank of America Corp. (Solar Panels)
A bond issued as part of Bank of America’s $125 billion environmental business initiative, whose proceeds will be used to finance renewable energy projects including solar, wind, and geothermal energy. For example, at Antioch Unified School District in California, solar panels were purchased and installed, as was energy efficient lighting equipment and HVAC
upgrades at 24 school sites.

Fannie Mae 2017 M10 AV2 (Green Buildings)
A securitization of 20 apartment building mortgages originated under the Fannie Mae Green Financing Business, where the underlying buildings have received either a green building certification such as Leadership in Energy and Environmental Design (LEED); Energy Star; Green Globers; or were targeting 20% or more reduction in energy or water

Nacional Financiera SNC (Wind Farms)
The first green bond transaction undertaken by a development bank in Latin America whose proceeds will be used to fund loans to renewable energy projects in Mexico, including wind energy generation and infrastructure for the transmission of wind energy projects.

Regency Centers Corp. (LEED Certified)
Since 2009, two-thirds of this real estate investment trust’s real estate projects via green bond proceeds have received certification from the U.S. Green Building Council’s LEED program.

Toyota Auto Receivable 2016-B (Hybrid Vehicles)
Proceeds to Toyota Motor Credit Corporation will be applied exclusively to finance future originations of loans and leases for gas-electric hybrid or alternative fuel Toyota/Lexus vehicles. Although the focus of the Pension Boards’ sustainable fixed-income investments has been green bonds, in the spirit of effecting socially-beneficial change via the public fixed-
income markets, the Pension Boards also invests in social/impact bonds as profiled below:

BNG Bank (Focus on deprived neighborhoods)
Through BNG, a Dutch bank, social bond proceeds will go to improve living conditions and social inclusion for people experiencing poverty.

International Finance Corporation (Women-owned business)
Social bond proceeds will be used to finance women-owned enterprises, as well as lend to companies that incorporate people who earn extremely low incomes.

Starbucks (Fair treatment of workers)
Impact bond proceeds will ensure that coffee is grown and distributed in a sustainable way using ethical sourcing standards regarding treatment of workers and the use of pesticides.

Finance projects that address social issues for targeted populations and that provide beneficial social or environmental impact alongside, or in lieu of, a financial return.