How To Invest in Green Bonds

More investors who want to make their money matter are turning to green bonds, which help finance sustainable projects. You can invest in several funds that buy green bonds, but how do you make sure they are as green as they say they are? Read to find out.

SustainFi Updated July 2, 2021

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What are green bonds?

Green bonds finance sustainable projects like clean energy and green buildings. The first green bond was issued in 2007. By 2020 green bond issuance exceeded $260 billion and could be on track to reach $400-450 billion in 2021.

Green bonds have been issued by companies like Apple and Toyota, and even the governments of France and Germany. For example, Apple’s green bonds financed renewable energy at its facilities and recycling materials from used phones. Carmakers Daimler and Volkswagen used green bonds to fund electric car projects.

Who says that green bonds are green?

There is no universal certification for green bonds, which has led to some abuses of the green bond label. China, one of the world’s biggest green-bond issuers, has been criticized for using green bonds to finance coal-burning power plants or to help pay for everyday expenses.

Green bond issuers can follow a voluntary set of guidelines, the Green Bond Principles, endorsed by the International Capital Market Association in 2014. Bonds can also be certified by rating agencies Moody’s, S&P, and Sustainalytics. However, most of the green bond market is not certified. According to the Climate Bonds Initiative, an NGO that facilitates a common set of standards for green bonds, only 17% of green bonds were externally certified in 2019, and only 38% provided updates on how the money was spent after the bond issuance.

In 2020, the European Union started working on establishing a common standard for green bonds, the Green Bond Standard. But the standard will also be voluntary.

Are there alternatives to green bonds?

Green bonds have an emerging rival – sustainability-linked bonds, which are not tied to a particular environmental project. Rather, the interest rate borrowers pay is tied to meeting various environmental, social, or governance (ESG) targets. Sustainability-linked bonds emerged in 2019, reaching $9 billion in issuance in 2020, according to Bloomberg.

If I invest in green bonds, do I have to sacrifice returns?

Returns have been comparable to investment grade bonds, the safest type of bonds in the market. Green bonds carry the same credit rating as other bonds of the same issuer.

Some studies have found a “greenium” or premium for green bonds, reflecting strong investor demand. Others, including a study from the Climate Bonds Initiative, have questioned the existence of the “greenium.”

What about fees? Green bond fund expense ratios tend to be higher than those of generic bond funds. That’s because the green bond market is much smaller and less liquid. However, we found that though green bond mutual funds are pricey, green bond ETFs (BGRN and GRNB) have reasonable expense ratios of 0.20%.

Further, if you invest in a green bond fund, you know that most of the proceeds will go to sustainable causes and not to finance Exxon’s latest pipeline.

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How do you buy green bonds?

Small individual investors can’t buy green bonds (or other bonds) directly. Bonds are sold to institutions such as pension funds that buy large chunks.

However, over the past few years, several ETFs and mutual funds have let individuals access the green bond market. Today there are two green bond ETFs and three green bond mutual funds.

💰 Takeaway

We like the VanEck Green Bond ETF (GRNB), which has strict green bond inclusion criteria and costs a reasonable 0.20%.

Top five green bond funds by assets under management

FundTickerTypeExpense RatioAssets ($m)2020 PerformanceSEC Yield
Calvert Green Bond FundCGAFXMutual fund0.73%8917.0%1.00%
iShares Global Green Bond ETFBGRNETF0.20%2116.9%0.50%
VanEck Vectors Green Bond ETFGRNBETF0.20%888.0%1.75%
TIAA-CREF Green Bond Fund TGROXMutual fund0.80%538.4%1.78%
Mirova Global Green Bond Fund MGGAXMutual fund0.98%437.6%-0.03%

iShares Global Green Bond ETF (BGRN)

  • Type: ETF
  • Expense ratio: 0.20%

Launched in 2018 by asset manager BlackRock, BGRN tracks a basket of investment grade green bonds. All bonds align with rating agency MSCI’s Green Bond Principles.

Qualifying bonds must fund projects in alternative energy, energy efficiency, pollution prevention and control, sustainable water, green building, or climate adaption. Bond issuers must also maintain processes for selecting green projects, managing proceeds, and reporting environmental impact. The bonds do not need to be explicitly labeled as “green,” so long as they meet MSCI’s inclusion criteria.

The ETF has over 500 holdings. The biggest geographical concentrations are France, supranational entities, Germany, and the United States. The fund has a high (AA) ESG rating from MSCI.

VanEck Green Bond ETF (GRNB)

  • Type: ETF
  • Expense ratio: 0.20%

Launched in 2017, GRNB also tracks a basket of green bonds, but it is more selective than BGRN. It only includes bonds that are certified green by the Climate Bonds Initiative, the London-based NGO. Issuers may be located in any geography, but holdings must be USD-denominated.

Because GRNB is more selective than BGRN, it only has 265 holdings, mostly issued by U.S., China, and supranational borrowers like the European Investment Bank. Strict inclusion criteria limit the ETF’s assets; it currently has less than $100 million under management.

BGRN includes up to 20% of high-yield bonds (which are deemed less safe than investment grade bonds by the credit rating agencies). As a result, the fund offers a higher yield than GRNB.

Calvert Green Bond Fund (CGAFX)

  • Type: mutual fund
  • Expense ratio (Class A Shares): 0.73%

The largest green bond fund in the market, Calvert’s Green Bond Fund, invests in bonds that Calvert’s investment team considers “green.” That includes bonds that finance specific environmental projects and bonds issued by environmental leaders.

Due to broader bond inclusion criteria, Calvert’s fund is pretty large with over $800 million in assets. The portfolio includes over 180 holdings, mostly investment grade bonds. Top issuers are France, Apple, and TerraForm Power, a solar and wind-powered utility.

Calvert is one of the largest ESG investment managers. The Green Bond Fund is actively managed and charges a 0.73% fee. Class A shares have a minimum investment of $1,000.

TIAA-CREF Green Bond Fund (TGROX)

  • Type: mutual fund
  • Expense ratio (Retail Shares): 0.80%

Established in late 2018, the TIAA-CREF Green Bond Fund is an actively managed green bond fund. Fund manager Nuveen decides what bonds are green. The team tries to pick bonds with an ESG impact, such as bonds issued by renewable energy companies, even if not explicitly labeled green. One of the top ten holdings is Avangrid, which owns and operates a portfolio of renewable energy facilities across the U.S.

Because the unlabeled green bond market is reportedly three times the size of the labeled market, broader inclusion criteria grow the investable universe.

The fund has around 150 holdings, largely investment-grade corporate bonds. Top issuers are the European Investment Bank, Federal Agricultural Mortgage Corporation, and Asian Development Bank. Around one-third of holdings are allocated to international issuers.

Retail shares cost 0.80%, in line with other actively managed ESG bond funds (but much costlier than comparable ETFs.)

Mirova Global Green Bond Fund (MGGAX)

  • Type: mutual fund
  • Expense ratio (Class A Shares): 0.98%

Established in 2017 by Mirova, a sustainability-focused subsidiary of French asset manager Natixis, MGGAX invests in bonds financing environmentally beneficial projects.

The fund has roughly 80 holdings, such as the government of France and wind power company Orsted. Mirova must invest at least 40% of the fund in international bonds, including up to 20% in emerging markets bonds. The portfolio is mostly composed of investment-grade bonds; lower-quality high-yield bonds are capped at 20%.

The fund is small (around $40 million in assets) and very expensive (nearly 1% expense ratio).

💰 Takeaway

  • Green bonds let you diversify your portfolio and support environmental projects at the same time
  • However, the green bond market is still small and illiquid, so we suggest adding other (non-green) ESG bonds to your portfolio
  • Green bond mutual funds are very expensive, so we suggest green bond ETFs instead of mutual funds
  • Our top choice is the VanEck Green Bond ETF (GRNB)

🔔 If you want to invest in the climate transition, you can also explore carbon credit funds.