The issuance of green bonds—tax-exempt bonds issued by federally qualified organizations and municipalities for the development of brownfield sites—has surged in recent years along with investor appetite for renewable energy. Green bond issuance spiked 120% to $93.4 billion globally last year, surpassing $155 billion in 2018. While the industry represents a lot of potential for growth, it also faces significant long-term risks.

Risks of Going Green

One of the largest detractors when investing in green bonds is a lack of liquidity. Being a small market, entering and exiting positions is not as easy as more popular investments. If you’re looking for a liquid investment, then you should consider avoiding green bonds at least until the demand for new issuances is high, and the market continues to grow. In the current green bond investing climate, they should be strongly considered as an investment an investor might need to hold until maturity.

Another risk is the lack of a clear definition for a green bond—investors might not know exactly where their money is going, meaning that it could potentially be used for the wrong reasons. For example, The EDF Group, which provides home and business energy in the U.K., operates nuclear power plants in France and Britain, issuing a €1.4 billion green bond. Nuclear power, effective as it may be, maybe not be as green as bond purchases desire. (See More: Green Bonds: Fixed Returns to Fix the Planet)

Other risks for green bonds include: low yields, mispricing, a lack of sufficient complex research available to make an educated investment decision, and the existence of some green bond issuers with unscrupulous reputations for money laundering and LIBOR fixing. 

When oil prices are low, the demand for alternative energy declines. Support for green energy around the world is large, often helping offset a decline in the price of oil.

Budding Opportunities

Going green is a popular trend, and one that looks set to continue as long as interest grows and new investors are given environmentally-conscious investment options within their portfolios. Governments around the world—including the U.S.—are likely to present favorable regulation, which will, in turn, help many green projects. As of late 2018, investing in green bonds is similar to investing in U.S. Treasuries. Investors will not see significant returns but will find relative safety.

Green bonds are gaining popularity in the U.S. For example, in May 2013, Tesla Motors, Inc. (TSLA) issued a $600 million convertible green bond. In March 2014, Toyota Motor Corp (TM) issued asset-backed security to finance hybrid vehicle loans.

Green bond growth is evident in the U.S., but popularity began with power companies in France. This is more of a global story than a domestic one. Here are some supranational issuers of green bonds:

  • European Investment Bank
  • African Development Bank
  • European Bank for Reconstruction and Development
  • World Bank

On top of that, the World Economic Forum suggests that $700 billion per year needs to be invested in clean energy, transportation, and forestry. The International Energy Agency recommends $1 trillion per year in the low carbon economy.

Other corporate green bond issuances include:

  • Vasakronan (a Swedish real estate company)
  • Unibail-Rodamco (commercial property in Europe)
  • Unilever plc (UL)
  • SCA: Svenska Cellulosa Aktiebolaget (Europe's largest private forest owner; it has ambitions to pursue profitable and responsible forestry activities)
  • Skanska (a global project development and construction group)

You can also invest in green bonds directly via Calvert Green Bond A (CGAFX). As of October 2018, CGAFX hovers near its initial offering price and might be considered a buying opportunity as it bottoms out.

The Bottom Line

Green bonds are without a doubt on the rise, and that trend is likely to continue. However, if you’re the type of investor that seeks liquidity, then consider waiting until the market grows larger and more investment products are available.