Description
Our Perspective
GREEN BONDS - JULY 2016
Ronald Schwartz, CFA
Managing Director,
Senior Portfolio Manager,
Tax-Exempt
Ron is a Senior Portfolio
Manager focused on the TaxExempt Strategies. He has
worked in the investment
management industry since
1982. Ron received a B.A. in
Business Administration from
Adelphi University and is a CFA
Charterholder and a member of
the CFA Society of Orlando.
Municipal green bond issuance has increased significantly over the past three years since
Massachusetts became the first state to offer tax exempt bonds designated as ‘green’ in 2013.
While only a small part of the municipal market, at over $10.8bn in outstanding bonds, there is
growing domestic and global demand for sustainable, responsible, and impact (SRI) investing.
Green bond issuance increased 16% in 2015 to over $42bn (see chart below).
U.S. municipal bonds since their inception have been used for capital projects and infrastructure that have delivered benefits that today could be construed as green and socially responsible. While we have not seen much pricing differential between an issuer’s regular bonds and their green bonds, we do believe that investor demand is going to grow for SRI assets, and green muni bonds could outperform as a result. Bonds whose proceeds are specifically used for environmental, climate, or other sustainable purposes can be designated as green.
Green bonds are self-labeled by the issuer with a voluntary set of rules from the Green Bond Principles (GBP). Under GBP, issuers can use green bonds for renewable energy, energy efficiency, sustainable waste management, sustainable land use, biodiversity conservation, clean transportation, clean water, and/or drinking water. The European Investment Bank sold the first ‘green’ bond in 2007 and issuance has increased dramatically over the past few years and is projected to top $100bn in 2016 (see chart below). Corporate and Muni Bonds Make Up a Growing Proportion of Issuance Scott Andreson Director, Municipal Research Scott is the Director of Municipal Research for Seix Investment Advisors.
He has more than 17 years of investment experience. He earned his MPA from USC and is a current officer of the National Federation of Municipal Analysts. CONTRIBUTORS Dusty Self Managing Director, Senior Portfolio Manager, Tax-Exempt Phillip Hooks, CFA Vice President, Municipal Credit Research Source: www.Climatebonds.net - Bonds and Climate Change, July 2016 . Our Perspective GREEN BONDS - JULY 2016 New York, California and Massachusetts Are the Top 3 Climate-Aligned Bonds Issuers The states with the largest issuance of tax exempt green bonds are New York, California, and Massachusetts. The bonds have primarily financed transportation, water, and renewable energy projects. Source: www.Climatebonds.net - Bonds and Climate Change, July 2016 Internally, we evaluate a green bond based solely on the credit fundamentals of the issuer since the only effective difference is the use of the proceeds. Therefore, if the security for an issuer’s green bond is the same as their other bonds; performance is linked to their underlying credit. However, if demand grows for SRI designated assets, it is likely a green bond could outperform pari passu obligations for purely technical reasons due to the green labeling.
As you can see in the yield chart below, there has been very limited yield differential between Massachusetts general obligation bonds and their green general obligation bonds. Source: Morgan Stanley . Our Perspective GREEN BONDS - JULY 2016 SRI tax exempt investing is still somewhat in its infancy and we have not seen any significant pricing differential between green and regular bonds. As we have previously stated, most muni bonds are used for capital projects and infrastructure that have historically delivered benefits that today could be construed as green and socially responsible. As such, many traditional investors view the new ‘green’ designation as more of a marketing ploy, particularly since the current standards and accountability are voluntary, which could be one of the reasons for the lack of a pricing differential. Municipal bonds also often lag taxable fixed income investing trends because of the large component of individual investors, but retail appetite for environmentally friendly investing is likely to grow going forward.
The green designation may also expand the network for potential investors, including cross-over investors that are not typically active in the tax exempt market. Currently, the green designation is a free option, and if we like the underlying credit and sector, we will continue to overweight green bonds in anticipation of growing impact investing demand that could lead to technical outperformance. The assertions in this perspective are Seix Investment Advisors’ opinion. BofA Merrill Lynch Municipal Master Index tracks the performance of the investment-grade U.S. tax-exempt bond market.
Qualifying bonds must have at least one year remaining term to maturity, a fixed coupon schedule, and an investment grade rating (based on average of Moody’s, S&P, and Fitch). Investment Risks: All investments involve risk. Debt securities (bonds) offer a relatively stable level of income, although bond prices will fluctuate providing the potential for principal gain or loss. Intermediate-term, higher-quality bonds generally offer less risk than longer-term bonds and a lower rate of return.
Generally, a portfolio’s fixed income securities will decrease in value if interest rates rise and vice versa. A portfolio’s income may be subject to certain state and local taxes and, depending on your tax status, the federal alternative minimum tax. There is no guarantee a specific investment strategy will be successful. This information and general market-related projections are based on information available at the time, are subject to change without notice, are for informational purposes only, are not intended as individual or specific advice, may not represent the opinions of the entire firm, and may not be relied upon for individual investing purposes.
Information provided is general and educational in nature, provided as general guidance on the subject covered, and is not intended to be authoritative. All information contained herein is believed to be correct, but accuracy cannot be guaranteed. This information may coincide or conflict with activities of the portfolio managers.
It is not intended to be, and should not be construed as investment, legal, estate planning, or tax advice. Seix Investment Advisors does not provide legal, estate planning or tax advice. Investors are advised to consult with their investment processional about their specific financial needs and goals before making any investment decisions. Past performance is not indicative of future results. ©2016 Seix Investment Advisors LLC.
Seix Investment Advisors is a registered investment adviser with the SEC and a member of the RidgeWorth Capital Management LLC network of investment firms. .
U.S. municipal bonds since their inception have been used for capital projects and infrastructure that have delivered benefits that today could be construed as green and socially responsible. While we have not seen much pricing differential between an issuer’s regular bonds and their green bonds, we do believe that investor demand is going to grow for SRI assets, and green muni bonds could outperform as a result. Bonds whose proceeds are specifically used for environmental, climate, or other sustainable purposes can be designated as green.
Green bonds are self-labeled by the issuer with a voluntary set of rules from the Green Bond Principles (GBP). Under GBP, issuers can use green bonds for renewable energy, energy efficiency, sustainable waste management, sustainable land use, biodiversity conservation, clean transportation, clean water, and/or drinking water. The European Investment Bank sold the first ‘green’ bond in 2007 and issuance has increased dramatically over the past few years and is projected to top $100bn in 2016 (see chart below). Corporate and Muni Bonds Make Up a Growing Proportion of Issuance Scott Andreson Director, Municipal Research Scott is the Director of Municipal Research for Seix Investment Advisors.
He has more than 17 years of investment experience. He earned his MPA from USC and is a current officer of the National Federation of Municipal Analysts. CONTRIBUTORS Dusty Self Managing Director, Senior Portfolio Manager, Tax-Exempt Phillip Hooks, CFA Vice President, Municipal Credit Research Source: www.Climatebonds.net - Bonds and Climate Change, July 2016 . Our Perspective GREEN BONDS - JULY 2016 New York, California and Massachusetts Are the Top 3 Climate-Aligned Bonds Issuers The states with the largest issuance of tax exempt green bonds are New York, California, and Massachusetts. The bonds have primarily financed transportation, water, and renewable energy projects. Source: www.Climatebonds.net - Bonds and Climate Change, July 2016 Internally, we evaluate a green bond based solely on the credit fundamentals of the issuer since the only effective difference is the use of the proceeds. Therefore, if the security for an issuer’s green bond is the same as their other bonds; performance is linked to their underlying credit. However, if demand grows for SRI designated assets, it is likely a green bond could outperform pari passu obligations for purely technical reasons due to the green labeling.
As you can see in the yield chart below, there has been very limited yield differential between Massachusetts general obligation bonds and their green general obligation bonds. Source: Morgan Stanley . Our Perspective GREEN BONDS - JULY 2016 SRI tax exempt investing is still somewhat in its infancy and we have not seen any significant pricing differential between green and regular bonds. As we have previously stated, most muni bonds are used for capital projects and infrastructure that have historically delivered benefits that today could be construed as green and socially responsible. As such, many traditional investors view the new ‘green’ designation as more of a marketing ploy, particularly since the current standards and accountability are voluntary, which could be one of the reasons for the lack of a pricing differential. Municipal bonds also often lag taxable fixed income investing trends because of the large component of individual investors, but retail appetite for environmentally friendly investing is likely to grow going forward.
The green designation may also expand the network for potential investors, including cross-over investors that are not typically active in the tax exempt market. Currently, the green designation is a free option, and if we like the underlying credit and sector, we will continue to overweight green bonds in anticipation of growing impact investing demand that could lead to technical outperformance. The assertions in this perspective are Seix Investment Advisors’ opinion. BofA Merrill Lynch Municipal Master Index tracks the performance of the investment-grade U.S. tax-exempt bond market.
Qualifying bonds must have at least one year remaining term to maturity, a fixed coupon schedule, and an investment grade rating (based on average of Moody’s, S&P, and Fitch). Investment Risks: All investments involve risk. Debt securities (bonds) offer a relatively stable level of income, although bond prices will fluctuate providing the potential for principal gain or loss. Intermediate-term, higher-quality bonds generally offer less risk than longer-term bonds and a lower rate of return.
Generally, a portfolio’s fixed income securities will decrease in value if interest rates rise and vice versa. A portfolio’s income may be subject to certain state and local taxes and, depending on your tax status, the federal alternative minimum tax. There is no guarantee a specific investment strategy will be successful. This information and general market-related projections are based on information available at the time, are subject to change without notice, are for informational purposes only, are not intended as individual or specific advice, may not represent the opinions of the entire firm, and may not be relied upon for individual investing purposes.
Information provided is general and educational in nature, provided as general guidance on the subject covered, and is not intended to be authoritative. All information contained herein is believed to be correct, but accuracy cannot be guaranteed. This information may coincide or conflict with activities of the portfolio managers.
It is not intended to be, and should not be construed as investment, legal, estate planning, or tax advice. Seix Investment Advisors does not provide legal, estate planning or tax advice. Investors are advised to consult with their investment processional about their specific financial needs and goals before making any investment decisions. Past performance is not indicative of future results. ©2016 Seix Investment Advisors LLC.
Seix Investment Advisors is a registered investment adviser with the SEC and a member of the RidgeWorth Capital Management LLC network of investment firms. .
