If you were to hear the term green bond, you could be forgiven for thinking that a Hollywood director had decided to merge the Incredible Hulk with Britain’s favourite secret agent. You would be sadly mistaken, however, as green bonds are in fact tax-exempt investment vehicles that are beginning to take the financial market by storm. Issued by qualified organisations and municipalities, the value of this market more than trebled to $36.6 billion in 2014, while last year it peaked at an impressive $100 billion.
The Rise of Green Bonds: Do they make for Good Investments?
As a general rule, bonds have always represented a safe and reliable store of money for anyone who is able to commit the required amount of money for a year or more. The rise of green bonds has added a unique dimension to this market, however, especially as a growing number of countries have begun to issue these to mainstream investors.
Mexico is the latest country to enter the fray, with a national development bank having recently issued a total of 2 billion pesos ($109 million) in green bonds. The proceeds from these seven-year green bonds will be put towards the development of green power generation in the states of Puebla and Nayarit, as Mexico looks to follow the United States lead as a purveyor of sustainable energy. This is a prerequisite of green bonds, as all money generated must be used to finance environmentally-friendly projects.
This is part of a wider trend gripping the investment market, with the US have generated an impressive $10.5 billion in green bond sales last year. South American nation Brazil also delivered $600 million through a similar initiative, while Mexico’s most recent efforts is expected to generated $500 million in revenue.
Beyond the Headlines: Are Green Bonds good for Investors?
While green bonds are becoming increasingly popular and sought-after, however, it is worth considering whether or not they are suitable for you as an investor? After all, Latin American traders in Mexico were initially loath to make their move, while gaps in knowledge and a volatile economic climate as made others cautious of new investment vehicles.
Make no mistake; however, green bonds represent a progressive and exciting investment choice that will become increasingly accessible over the course of the next decade. It cannot be escaped that green and sustainable initiatives are part of an incredibly popular global trend, and one that is sure to continue over a concerted period of time. This, along with the highly favourable regulatory measures and tax advantages that likely to be made available through associated investments, mean that vehicles such as green bonds are fast-emerged as a secure and lucrative store of wealth in the current climate.
Beyond this, green bonds (and similar, sustainable investments) offer traders the opportunity to further diversify their portfolios, which can prove invaluable during of economic or geopolitical uncertainty. Such diversification enables traders to tailor their portfolios to suit the real-time climate, while it also helps them to evenly spread or in most case diminishes their level of risk. So if you already invest in volatile markets such as the foreign exchange, green bonds can help to balance your portfolio while providing the type of modest but sustainable returns that drive regular income.
The Last Word
Ultimately, the choice of whether or not to invest in green bonds is a personal one. What cannot be denied, however, is the rising popularity and relevance of this investment vehicle, particularly when you consider the prominence of government-backed green initiatives and incentives. So regardless of your outlook or appetite for risk, green bonds represent a long-term investment option that are likely to add incremental value to your portfolio.