TORONTO, Nov. 1, 2013 /CNW/ - Green bonds are emerging as a frontrunner
to fund environmental investment and have garnered a considerable
amount of attention from both investors and environmentalists, states
TD Economics in a special report released today.
There is a desperate need for funding of environmental initiatives, and
the reality is that governments around the world lack the financial
resources to meet all of the current and future requirements. The
natural solution is to attract private sector investment into
environmental initiatives, and one way to accomplish this is to issue
debt instruments, particularly bonds, with the raised capital dedicated
to the initiative.
Defining the space
"Green bonds are like victory bonds for the environment," said Craig
Alexander, Senior Vice President and Chief Economist for TD Bank. "With
their exclusive focus on supporting green initiatives, they are a good
way to secure large amounts of capital to support many different
environmental investments - from renewable energy technologies to
public transportation - as was seen with this week's green bond
announcement from the Ontario government."
While similar in many ways to traditional bonds issued for general
corporate use, green bonds differ in that they are monitored to ensure
funds are being used to exclusively support environmental projects.
This monitoring process is transparent and made available to investors.
Investor profile
Institutional investors - such as pension funds, mutual funds, insurance
companies and sovereign wealth funds - are the natural market for green
bonds. These investors hold about 72% of long-term investment in the
global bond market, and have significant portfolio requirements for
fixed-income investments.
However, green bonds also have a broad appeal, albeit on a smaller
scale, with retail investors who have indirect exposure to bonds
through pension and mutual fund holdings. A case in point, some green
bonds issued abroad have experienced demand from households. Indeed, a
World Bank issue of green bonds was targeted specifically at Japanese
individual investors.
Future potential
The outlook for green bonds is very promising. Demand for green bonds is
significant and has been growing rapidly over the past six years.
Current estimates place the value of the green bonds market between
US$10-346 billion - a broad range due to various definitions adopted
and the absence of a standardized format.
Investing in environmental projects can often be lucrative for
investors. Many green bonds are deemed low risk because they are issued
with strong credit ratings and they often generate a higher return than
traditional benchmark bonds. In light of the relative outperformance,
investors are finding that going green is win-win - it's good for both
the world and their wallets.
One issue the green bond market today faces is a lack of standardization
in definitions, format and projects, making assessing its size
problematic. But even using the broadest definition, the green bond is
small today but has great room to grow.
"Current definition challenges should be conquered as the green bond
market matures and grows," concluded Mr. Alexander. "That being said,
structure and return will remain the key considerations for continued
success and increased demand."
To read today's report, titled "Green Bonds: Victory Bonds for the Environment," please visit td.com/economics under November 1, 2013.
SOURCE TD Bank Group
