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Political Shift Might Not Stop Green Bonds

By Murray Coleman April 4, 2017

After running into a political brick wall with attempts to reform America’s healthcare industry, President Donald Trump isn’t wasting any time setting his sights on a new agenda – rolling back years of Democrat-fueled environmental regulations and climate change initiatives.

But such moves at the federal level, say fixed-income analysts, run counter to grassroots efforts by state and local government officials to promote so-called green projects.

“No matter what the political environment might be in Washington, green bonds have a lot of momentum already built up at the local level,” says Beijia Ma, an analyst at Merrill Lynch who tracks this emerging marketplace.

Green bonds are used to finance everything from environmentally sensitive construction projects to cleaner waste treatment systems and development of renewable energy technologies.

In fact, 2017 marks 10 years for the creation of such bonds, says Ma, who credits the European Investment Bank in Luxembourg as creating the first set of issues.

Based on current growth rates, Moody’s forecasts $206 billion of green bonds will be issued globally in 2017, the ratings agency tells the Financial Times. An estimated $23 billion of that amount will come from U.S. investors.

In fact, the ratings agency figures that last year alone investments into green bonds surged by 55% here and 120% worldwide.

“In the U.S., we’re seeing a much bigger grassroots movement to include green bonds into investment portfolios than in Europe or Asia,” Ma says. As a result, she adds, “this type of bond is likely to continue to impact portfolios for years to come.”

Millennial clients, in particular – both rising professionals and younger family members – seem markedly enamored with such an investment theme, according to Ma.

“In terms of potential diversification tools to use,” the Merrill researcher adds, “we believe that green bonds should be at the top of an advisor’s list of ways to get access to environmentally sensitive investments.”

Another important point to bring up with clients is how green bonds can help diversify fixed income portfolios, notes Benjamin Bailey, a fixed income portfolio manager at Everence Financial in Goshen, Ind.

The diversified financial services company and wealth management firm now oversees nearly $3 billion, mainly through a family of mutual funds and separately-managed accounts.

Molly Betournay

The market has grown to the point where environmentally-friendly options can now be found across fixed income segments, according to Bailey.

He finds that an “impact” investing portfolio he co-manages most recently was investing about a quarter of its holdings in green- and sustainable-related bonds. That was up from about 17% in past years.

But caveats do exist, Bailey cautions. “Although it’s a strong area of issuance, green bonds are still a relatively small part of the overall fixed income marketplace,” he says.

The veteran bond fund manager – whose firm was founded in 1945 by the Mennonite Church and adheres to a socially conscious investing strategy – adds that “we’re being careful to be highly selective on which types of these bonds to add to our mutual fund and managed account portfolios.”

The still-evolving market’s rising popularity comes as market leaders grapple with a lack of uniform standards determining what is truly green and what isn’t, observes Molly Betournay, an analyst at Pathstone Federal Street in Fort Lee, N.J.

The head of impact investing at the independent RIA, which manages about $9.5 billion, is seeing popularity for such issues result in “questionably-labeled” bonds coming to market.

By her firm’s estimates, green bonds now make up less than 1% of global debt markets. As a result, Betournay believes it’s important for advisors to keep investors’ expectations in check.

“While we’re encouraging our clients to add some exposure to these types of investments,” Betournay says, “we also make sure they understand this is a niche market and [these investments] should be considered complements to a more broadly diversified fixed-income portfolio.”