By Rebekah Swan, ESG Investment Specialist, NZ / Client Advocate / Head of Product New Zealand, AMP Capital NZ
Bonds have been around for thousands of years and have become a staple of government and private financing. While green bonds have only been in the marketplace for a little over a decade, the green bond market has made substantial progress in recent years. Green bonds are undoubtedly among the fastest growing fixed income instruments.
So, what exactly are green bonds? Green bonds are much like traditional bonds, except their proceeds are used for projects with tangible environmental and social benefits (often also referred to as social bonds). The bond’s risk profile remains dependent on the underlying credit quality of the issuer and the terms, conditions and maturity operate similarly to other types of bonds.
In practice, it is how proceeds are used that sets a green bond apart from other bonds – the proceeds must be applied for a specific green purpose. For instance, the type of projects funded by green bonds could include projects related to clean water, renewable energy, energy efficiency, reducing greenhouse gas emissions, or mitigation of climate change impacts.
A challenge for green bonds is defining what constitutes ‘tangible environmental benefits’ – it needs to be more than a statement from the issuer claiming success.
Over the past decade definitions have evolved and precedents have been established as investors in green bonds expect enough detailed information from issuers to be able to judge if the bond is sufficiently green. They want to know how the funds are used and see tangible evidence of positive impacts.
One of the issues is that there is no legal definition of a green bond and no specific legal requirement is necessary for issuing these types of bonds. However, issuers can voluntarily comply with published standards such as the Green Bond Principles (GBP) which provide clear guidelines for what can be labelled as a green bond.
Though the concept is only about a decade old, green bonds are becoming a credible asset class as more and more asset managers increase their allocation to them.
This is supported by an increasing appetite for green investment and investors’ growing commitment to support environmentally friendly projects.
AMP Capital is part of this movement and has been progressively introducing green bonds into its fixed interest portfolios. The Ethical Leaders Hedged Global Fixed Interest currently has 20 green bonds and our NZ Fixed Interest Fund has recently added two green bonds to its portfolio. These bonds span a range of projects, including:
─ renewable energy generation, eg solar and wind power
─ greenhouse gas reduction
─ energy efficiency
─ waste management efficiency and recycling
─ wastewater treatment
─ wind farm development and wind repowering initiatives.
Green bonds are a small part of the overall bond market, but the market for green or environmentally-focused investments is likely to continue to grow as climate change raises the urgency for renewable energy and low carbon industries. For this reason, it is expected that the allocation to green and sustainable bonds will increasingly become an important part of our fixed income portfolios.
To find out more about our investment in green bonds refer to the latest AMP Capital Ethical Leaders Funds Engagement Report 2019, or to learn more about the green bond market download the white paper – The green bond market: from inception to today.
Important Note: Investors should read the relevant Product Disclosure Statement (PDS) before investing. The PDS contains important information on the Fund including specific risks. A copy of the PDS can be obtained from the AMP Capital Investors (New Zealand) Limited website www.ampcapital.com, by contacting the Client Service Centre on 0800 400 499, or by visiting the Disclose website www.business.govt.nz/disclose. The Manager and the Issuer of the Fund is AMP Investment Management (NZ) Limited, Meridian Building, Level 1, 55 Lady Elizabeth Lane, Queens Wharf, Wellington. While every care has been taken in the preparation of this communication, AMP Capital Investors (New Zealand) Limited makes no representations as to the accuracy or completeness of any statement in it. Past performance is not a reliable indicator of future performance. This communication has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this communication and seek professional advice, having regard to the investor’s objectives, financial situation and needs.