Over the past year or so we have written a couple Words about ESG Investing. ESG stands for Environmental and Social Governance which is a fancy way of saying that these funds hold themselves to a higher, more responsible standard than your average fund. Well, they are supposed to as you may have read in our previous Weekend Word, Is ESG Investing for you?. ESG investing has really taken off over the past five years with assets breaking the $1 trillion mark earlier this year. Lately we have also seen a rise in the issuance of a similar investment, Green Bonds.
What are Green Bonds? Green Bonds are bonds issued by governments, corporations or financial institutions where the proceeds must be used to finance projects that benefit the environment. They still have the same credit worthiness that the issuer has; which is great, because you aren’t taking on the risk of that specific project, but that of the issuer. Although, unlike ESG, Green Bonds do have potential standards set for qualification by the “Climate Bond Initiative”, but that doesn’t always mean they are exactly what you’d expect. While most Green Bond issuance is going towards alternative energy sources, there are companies that are issuing them to help finance lowering things like Co2 emissions or cleaning up their environmental practices.
While Green Bonds and ESG funds are similar it is important to look at them from a different perspective. ESG investing as it stands right now is about holding the companies you own to a higher standard, Green Bonds on the other hand are issued to promote change. While an oil company might not be considered an ESG company, they can release Green Bonds in an attempt to improve their environmental impact, meaning you know what your money is being used for. As these investments continue to gain popularity we should start to see increased standardization and investment options giving people the choice on how they wish to invest and potentially make a positive impact on the environment in the process, win win.
Investing in the stock market involves gains and losses and may not be suitable for all investors. The investment’s socially responsible focus may limit the investment options available to the investment and may result in returns lower than those from investments not subject to such investment considerations.