The Future of Investment Is Green Bonds and Green Funds
Green bonds and green investments have become the new buzzwords in the world of financial markets, as investors rush to protect natural capital. What are they exactly about? Why is there a growing interest in these financial instruments? What role can they play in the challenge to achieve sustainable development? While the environmental crisis doesn't show any sign of abating, the current predicament, which is without precedent in the history of mankind, has made natural capital a scarce and low-substitution resource, which is thus all the more precious and whose value needs to be conserved and protected, considered the increasing social costs and economic risks associated with its degradation. As a result, numerous financial organizations have started to pursue strategies and projects aimed at protecting the biosphere.
A research study released by J.P. Morgan Chase (2014) shows that in the 2009-2013 period more than 23 billion dollars were invested in impact investing initiatives aimed at natural conservation, both by international agencies and private investors. These investments aim at generating good returns for asset holders (on average, be they specialized in debt or equity, these funds pay an Internal Rate of Return – IRR – of between 5 and 10%), while at the same time safeguarding specific ecological biomes and natural habitats, and financing sustainable agriculture. The European Investment bank and the World Bank, for instance, have successfully launched Green Bonds and Carbon Funds aimed at mitigating the effects of deforestation, linked to the types of environmental remediation listed in the UN Framework Convention on Climate Change. Such bonds are usually bought by governments, pension funds, insurance companies, banks, and asset managers.
Even private multinational corporations issue green bonds: Unilever issued a $415 million loan in green bonds in order to finance the reduction of its environmental footprint; EDF issued $1.9 million in bonds to finance renewable energy projects and increase energy efficiency; Toyota (2013) tied $1.75 million in corporate bonds linked to the development of electric transportation and hybrid vehicles.
In recent years various investment funds were born to address environmental conservation. The Global Environment Fund was one of the earliest launched with the objective of investing in eco-systems and low-carbon technologies. Today it manages one billion dollars in assets: its portfolio is diversified but focused on sustainability solutions. Natural Capital Investment Fund, Earth Capital Partners, EKO Asset Management are other funds that target the value of nature and the services it generates.
So it seems that also the financial community is awakening to the threat posed by the loss of natural capital and to the opportunities that can arise from its safeguard. Credit Suisse and WWF have estimated in 200-300 billion dollars a year the cost of conserving global environmental wealth, an amount of money much larger than the sum currently invested. So there is ample room for progress, but involving financial actors is fundamental to reduce ecological impact and guarantee a sustainable future for all of us.