Could retirement portfolios save the planet?

by Joan Warner

When representatives from 195 nations signed the Paris climate accord last December, they moved the needle on global environmental stewardship. The pact requires all countries — not just the richest ones — to work toward limiting greenhouse gas emissions. “This agreement sends a powerful signal that the world is fully committed to a low-carbon future,” said President Obama after the deal was finalized. But changing the way people produce their food, construct their habitats, make their clothes, and get from place to place is going to be expensive. Who will pay for it all?

Enter green finance. This term of art covers vast ground, encompassing many different asset classes and many different climate- and sustainability-related initiatives. For example, it could include bonds issued by a city to build a new water management system, a private equity fund that invests in renewable energy, or even corporate debt. Famous-company example: Apple in February issued $1.5 billion worth of green bonds, part of a bigger debt offering, 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; and conserve precious resources,” according to the prospectus. The seven-year bonds have a semiannual coupon of 2.85%. Moody’s rated them Aa1. Goldman Sachs and Merrill Lynch were among the lead underwriters.

wind turbinesBefore you call your broker, wait—opportunities to green your portfolio are sprouting up (argh, sorry) all over. Organizations including the G20 Green Finance Study Group, which met in Beijing for the first time in January, are starting to put numbers around this market’s growth. A recent Financial Timescolumn by former Mexican president Felipe Calderón, now with the Global Commission on the Economy and Climate, says the world will need $90 trillion worth of infrastructure investment over the next 15 years. According to Calderón, ensuring these projects are low-carbon would add only 5% to up-front expenditures. For investors, that means there’s no longer a significant tradeoff between realizing a satisfying return and doing the right thing.

So while green bonds still account for just a sliver of the global fixed-income market, their share is growing fast. Last year, $41.8 billion worth of green bonds were issued, three times more than in 2012. Issuance could hit $70 billion in 2016, according to Moody’s—beating the rating agency’s own projections. “Five years from now, China’s green bond market alone will likely be worth $230 billion,” writes Calderón in the FT. And Wall Street, competing with underwriters around the world, is working to educate institutional investors about this debt category.

Green stocks and equity mutual funds may be trickier to integrate into a mainstream portfolio, because investing in individual alternative-energy, waste-recycling, or sustainable tech companies can add volatility. Still, a study published in the Journal of Business Ethicslast year showed that green funds outperformed “black” funds (those with exposure to fossil fuels) from 2012 to 2014, and that over time, the return gap between green and conventional mutual funds disappears.

I believe it won’t be long before before our 401(k) plans include such funds. I think green bonds—especially corporate debt, with its juicier yields—will catch on with institutional investors. And maybe one day soon it will seem odd to invest in conventional financial instruments when you can help save the planet instead.

Joanie Warner is the Thought Leadership team’s senior analyst for financial services.