How to invest in green, blue and social bonds

Ryan Lightfoot-Aminoff is a senior research analyst at Chelsea Financial Services.

Environmental, social and governance or ‘ESG’ issues have become popular in the world of equity investing in recent years.

More and more investors have been buying shares in companies that are doing something to help the planet and its inhabitants.

But less has been said about bonds – loans to companies and governments so that they can finance this work.

Here, we look at the different types of sustainable bonds available to investors: green, blue, social and sustainability-linked bonds. 

Green lending: More investors have been buying shares in companies doing something to help the planet, but you can also put money in bonds loaning them money to do the work

Green bonds: Put your money to use in environmental projects

Green bonds are loans which are ring-fenced by a company or a government for new and existing projects which deliver environmental benefits.

This could include a utility company issuing a bond to increase its renewables capacity, or a bus company looking to move to electric vehicles, for example.

Investors should be aware, however, that although the proceeds are used for green projects, the firm itself may not be ‘green’.

EDF, for example, has several green bonds outstanding, with proceeds allocated to renewable energy projects. EDF as a firm, however, also has considerable exposure to nuclear and coal energy. 

Blue bonds: Help protect our oceans and coastlines

These are used to finance ocean-related conservation projects. The money raised is directed to specific projects, such as protecting marine ecosystems and promoting better fishing practices will help economies to be more resilient.

This is important for the environment, but they also have a social aspect as protecting coastlines and ecosystems also ensures jobs are protected in the tourism and hospitality industries, for example.

However, the issuance of blue bonds has so far been minimal.

Ryan Lightfoot-Aminoff: Blue bonds have a social aspect as protecting coastlines and ecosystems also ensures jobs are protected

Ryan Lightfoot-Aminoff: Blue bonds have a social aspect as protecting coastlines and ecosystems also ensures jobs are protected

The Seychelles launched the world’s first sovereign blue bond in 2018, for example. And there are some in Australia linked to the coral reef. But this area of the market is still finding its feet. 

Social bonds: Fund governments and businesses trying to tackle humanitarian issues

Social bonds are a means of helping to finance solutions to social problems such as youth unemployment, long-term health issues and homelessness.

These bonds have been around for some time, but really took off during the pandemic, when investors became more cognisant of social concerns like health and welfare.

In April 2020, Guatemala became the first country to issue a sovereign social bond aimed at financing Covid-19 response efforts, for example.

Corporate social bond issuance is on the rise. With consumers now more attuned to social issues, social bonds provide companies with an instrument to demonstrate support for their wider stakeholders, from employees to customers and local communities. 

Sustainability-linked bonds: Support worthy targets – but earn more if issuers fall short

These bonds are not ring-fenced for green or sustainable purposes. Instead, issuers are committing to improvements in sustainable outcomes within a predetermined timeline.

And, if they fail to achieve their pledges, they must pay investors more as a penalty.

For example, retailers such as Tesco and H&M have issued these bonds with targets such as reducing carbon intensity, increased recycling of textile materials and cutting food waste.

In terms of benefits, these bonds provide an opportunity for companies in sectors that are challenged from an ESG standpoint, but which want to make improvements.

As such, they are currently experiencing the highest growth rates. As for disadvantages, several professional investors have said that the penalties are not large enough to incentivise the issuers to meet their targets. 

Marine life: Blue bonds are used to finance ocean-related conservation projects

Marine life: Blue bonds are used to finance ocean-related conservation projects

What funds and trusts might you consider for your portfolio?

Aegon Ethical Corporate Bond  (Ongoing charge: 0.48 per cent)

The ethical screening process of this fund evaluates the effects that certain companies’ activities, products, and services can have on the environment and society at large.

Some 20 per cent of the portfolio is currently invested in green, social, and sustainability-linked bonds.

Rathbone Ethical Bond (Ongoing charge: 0.65 per cent)

Launched 20 years ago, ethical exclusions for this fund are simple: no mining, arms, gambling, pornography, animal testing, nuclear power, alcohol, or tobacco.

small business

All positions must also have at least one positive environmental, social, or corporate governance quality.

Liontrust Monthly Income Bond (Ongoing charge: 0.57 per cent)

The managers of this fund start by analysing the economic backdrop, looking at aspects like interest rates and politics.

They then examine the company itself and its ability to meet its debt obligations, before assessing key environmental, social and governance factors.

TwentyFour Sustainable Short Term Bond Income (Ongoing charge: 0.55 per cent)

This fund invests worldwide mainly in shorter-term bonds. They tend to be from investment grade issuers that seek to promote environmental or social practices, with the managers excluding issuers active in controversial businesses or intensively using fossil resources.

SVS Church House Tenax Absolute Return Strategies (Ongoing charge: 1.35 per cent)

This is an absolute return fund that has a high weighting to bonds. The managers selectively invest in ESG bonds.

For example, they have been long-term investors in social bonds from Motability Group, which provides financing for disabled people to buy vehicles.