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What do investors want from green bonds? California survey finds answers

Issuance of green bonds, which refer to debt securities used to finance environmentally friendly projects, by municipal issuers have grown rapidly in recent years. State and local issuers of municipal bonds value green bonds as a way to finance projects related to areas such as sustainable energy, transportation, water and infrastructure, among others. Meanwhile, social impact investors appreciate the opportunity to put their money into assets that reflect their values.

Despite the upward trend, municipal green bonds still represent a comparatively small proportion of municipal bond offerings. That’s partly because investors are still unsure these relatively new securities will deliver the returns they hope to see.

The question is, how might issuers improve investor understanding of green bonds? A recent survey from Natixis Investment Managers sets out to answer that question by probing what impact investors are seeking from sustainable investment vehicles such as green bonds.  As discussed in a previous article, “sustainable investing” refers to investing strategies that take into account environmental, social and governance (ESG) factors related to a particular investment as a way of both generating returns and having a positive societal impact.

Natixis wanted to better understand what motivates sustainable investors. The survey, published in March 2018 and titled “The California Green Rush” was based on responses from 500 California-only investors, which were then compared to findings from a larger set of U.S. investors. The Natixis survey, prepared in partnership with the California State Treasurer’s office, was conducted by CoreData Research in October 2017.

The key challenge for entities that offer green bond issues, according to the final report on the survey, is to alleviate investor confusion about the bonds. The Natixis researchers concluded that greater transparency and more public education about this investment class is vital.

“Simply put, investing is a complicated proposition and individuals can likely benefit from clear information and education,” the study concludes. “The same could be said for green investing. Even though 77% of California respondents say they want their

investments to reflect their personal values, only 53% say they are knowledgeable about ESG investing. This knowledge gap could be leading to confusion.”

Based on the California survey findings, the Natixis team derives four key insights:

“Californians want their assets to make a difference.” More than three-quarters of the California investors surveyed “want their investments to reflect their personal values” and “want to know that their assets are doing social good,” particularly when it comes to the environment.

“Despite positive ESG perceptions, green bonds are not yet top of mind.” More than half the survey respondents said they were familiar with sustainable investments as a general class. But only 29% said they are familiar with green bonds specifically, and only 13% currently invest in green bonds.

“Personal benefits come before societal benefits.” Sustainable investing goals may be important to these investors, but they still expect the securities to meet their investment objectives. They intend to evaluate green muni bonds by the same performance measures they apply to other municipal investments, like risk, stability and income stream.

“Financial and non-financial variables all factor into the decision to go green.”  Likewise, returns matter to these investors. The survey describes the investor sentiment as having “a sense of enlightened self-interest: Investment performance is stressed first, social benefits second.”

Many respondents also cited uncertainty as to whether the bonds delivered on their promises for environmental progress. Seventy-two percent say they’d take a closer look at green bonds if they could be assured of greater transparency and standardized reporting on how well the securities live up to their billing (for example, by ensuring clear eligibility criteria and performance measures for green projects). More reliable evidence would encourage investors to look more closely at green bonds as an investment (a dynamic Project Invested has reported on previously).

To alleviate confusion and allay investors’ concerns, the Natixis report suggests a few steps as starting points to heighten public awareness and understanding of green investing, including the following:

  • Educating financial advisors and the media to present the facts about green bonds accurately to improve public understanding and help investors evaluate their options more knowledgeably.
  • Making green bond issues available in smaller denominations to allow small investors to experiment with the asset class while minimizing potential risk to their portfolios.

Although this Natixis survey represents a limited perspective, since it focuses strictly on respondents in the state of California, the findings offer a constructive starting point for thinking about the potential of green bonds as an investment vehicle, as well as solid actionable advice as to how public and investor understanding of these securities can be improved. Those in the process of developing green investment offerings, as well as investors themselves, may find the survey’s insights to be a useful guidepost as they seek a fuller understanding of this emerging asset class.

The California Green Rush (full report in PDF format)

 

Previously on Project Invested:

Profits with a purpose: Can sustainable investing harness markets to solve social problems? 

Evaluating green bonds: More information will boost investor confidence 

Study dispels myths about impact investing

 

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