Could green bonds save your retirement?

by Joan Warner

My last blog post asked, “Could retirement portfolios save the planet?” Today I’m wondering if helping to finance a healthier planet might also be the best way to finance my post-paycheck years.

The low-and-long interest rate environment is making things tough for income investors. I was shocked to read in the New York Times that Turkish stocks and bonds performed better last week than any other investments in the world. That’s right, Turkey, where a failed military coup in July was followed by a massive purge of generals, judges, and journalists; where headline inflation is closing in on 9%; and where the lira is tanking against the dollar. And Turkey isn’t the only struggling economy whose securities look good to global investors. Brazil and Russia are attracting assets like nobody’s business. Investors are so desperate for a few extras basis points of return they’ll overlook terrorism, mosquito-borne viruses, anything.

SolarThe managers pouring money into rocky emerging markets are hardly cowboys (well, OK, some of them are hedge funds). Many are pension funds and insurers, investors with liabilities to fund who can’t do it with developed-country bonds paying bupkis. Meanwhile, formerly “safe-haven” investments aren’t looking particularly safe these days, between Brexit and the American presidential candidate whom some Wall Street Journalcommentators call Agent Orange. “In places like Europe, the U.K. and the U.S., you have lots of risks but no reward,” one emerging-markets expert told the Times. “In the developing world, you have risks, but at least you are getting paid for it.”

For those of us reluctant to bet our retirement savings on Mongolia (another super-popular market, apparently), could green corporate bonds be a level-headed alternative? On the one hand, their yields today are more or less in line with non-green corporate debt. On the other hand, The Economist suggests they may be less volatile: A South Korean green bond lost less in value than its non-green counterparts after North Korea made aggressive noises a couple of years ago. As for risk, a major part of green bonds’ appeal is that they offer a hedge against climate risk, to which most individual investors have considerable exposure through index funds. According to the Sustainability Accounting Standards Board, climate change could have a material impact on 93% of U.S. stock capitalization. Ouch!

The slight price premium that some green bonds currently enjoy (yes, it’s been called a “greenium”) seems due mainly to scarcity: The market is so young that supply isn’t keeping up with demand. But if issuance continues its hyper-growth, that premium will shrink, and yields will rise. And when I need diversification and income, I can buy green auto bonds instead of debt issued by countries on the State Department’s travel watch list. I’ll get a hedge against my stock exposure to Detroit’s Big Three. I’ll feel like I’m doing my part for the planet. And I’ll get a decent coupon.