As a tech industry leader, Apple Inc. has changed the world with its innovative hardware and software breakthroughs, from the Mac computer to the iPod and iPhone.
Now the company is leading the way once again in a new growth area: green investing.
In February, Apple made a splash by issuing $1.5 billion in green bonds-debt securities issued with the goal of protecting the environment and mitigating climate change. It’s the largest green bond issue by a U.S. corporation to date.
“This will allow investors to show they will put their money where their hearts and concerns are,” Lisa Jackson, Apple’s vice president of environment, policy and social initiatives, says in an interview with Reuters.
Green bonds explained
What is a “green bond,” and how does it work? We know bonds are debt securities, a financial instrument issued by a company or government entity to raise capital through the debt markets.
When an investor buys a bond, he or she is essentially loaning money to the issuer for a specified period of time, typically in exchange for regular interest payments. Upon the bond’s maturity date, the investor’s initial investment-the face value of the bond-is returned to them.
For the issuer, capital raised through a bond issue can be used for any number of purposes, typically spelled out in the initial bond agreement (known as the prospectus for corporate bonds while for municipal bonds they are referred to as official statements). So a company that issues bonds to borrow through the debt market may use the funds to build a new factory; a city might issue bonds to, say, build a new school, or to repair streets and bridges.
A green bond works just like any other debt security, but with one key difference: the issuer commits to using the capital generated through the bond issue to fund environmentally friendly projects or activities.
Green bonds are one key tool in the toolbox of green finance, an innovative form of social impact investing that steers private financing toward combating environmental harm and climate change. Other such tools include green real estate funds, equity financing through green IPOs, socially responsible equity investing and more.
These investing vehicles can help to fund a variety of projects, such as cleaner renewable energy technologies like solar and wind power; sustainable land use and construction projects; and environmentally friendly transit systems. Proponents argue that these green investments will go a long way toward building a more sustainable economy, while sparking economic growth and creating new classes of jobs.
For example, in the case of Apple’s green bond issue, the company says it will be upping its use of renewable energy sources as part of its business operations, The Wall Street Journal reports:
Apple’s green bond – which will mature in 2023, and is written in green text on its otherwise standard bond prospectus – adds a high-profile company to the list of green-bond issuers.
In the prospectus, the company says its green bond follows the voluntary guidelines, and that it plans to use the money to:
- Reduce our impact on climate change by using renewable energy sources and driving energy efficiency in our facilities, products and supply chain.
- Pioneer the use of greener materials in our products and processes.
- Conserve precious resources.
Companies and underwriters can also benefit from issuing green bonds. One benefit is that issuing green bonds can help a company stand out by underscoring a commitment to environmental issues, according to KPMG International. And KPMG suggests green investing options can be good for the bottom line, since they “give issuers access to a broader range of investors than regular bonds or other asset classes.”
A growing trend
Following the 2015 Paris climate change agreement, green finance is likely to expand its reach. And green bond issues are expected to continue growing as more companies follow Apple’s lead in offering financial instruments targeted to investors committed to sustainability and environmental protection.
According to the nonprofit Climate Bonds Initiative, green bonds represent a steadily growing portion of the debt markets. In 2015, $41.8 billion in green bonds were issued worldwide-an all-time high. That’s still a relatively small part of the overall bond market, but it represents a growing share. Moody’s Investor Services estimates that green bond issues will rise to $50 billion this year, according to Reuters.
Those numbers represent more than private sector companies-governments are also increasingly active in the green bonds market. In the United States, local and state governments have begun reaching out to green investors by issuing green municipal bonds to fund climate friendly alternative energy projects, mass transit systems, infrastructure and other projects that benefit the community.
Most recently, China has embraced green finance as a strategy for confronting environmental challenges that have arisen as the country has industrialized over the last several decades. Green bond issuance for Chinese environmental projects is ramping up, working with capital from western financial institutions.
To learn more about green investing, or to make green bonds part of your own diversified portfolio, talk to a financial professional who can explain the field in more detail. Remember that while green financial vehicles work like other securities, there may be aspects of these types of investments, and other types of risk, you’ll want to consider to ensure they fit with your broader investing goals.
Financial innovation can be a powerful tool for solving many of society’s urgent problems. Green bonds, and green finance more broadly, are illustrating that fact by responding to our most pressing environmental challenges in a creative way.