Updated: Mar 25, 2022
As a continuation of last week’s article, we will go more into depth in sustainable investing strategies. While the “best-in-class” strategy is a very good way to invest in more sustainable firms with strong risk diversification, such a strategy requires a lot of research and time. For household traders and non-professionals, this is not always worth it. Instead, easy, and yet impactful, investment strategies that circumvent this are purchasing green bonds and sustainable bonds.
So, what are green bonds? A green bond is a “type of fixed-income instrument that is specifically earmarked to raise money for climate and environmental projects.” (Segal, 2021) By investing in such financial derivatives, household investors can bring money to projects and research that they support, while removing the barrier of in-depth research and exposure to undiversified risks. Green bonds can finance a wide range of projects that adhere to certain standards, bring a return to the investors, and ultimately allow the development of sustainable projects.
These projects are commonly aimed at energy efficiency projects, sustainable housing, and transportation. Additionally, projects supporting aquatic and terrestrial ecosystems, clean drinking water, reforestation and sustainable agriculture are of great interests.
What do green bonds look like in Switzerland? Today, there are 62 green bonds, 1 sustainability bond and 1 sustainability-linked bond listed on the Swiss Stock Exchange (SIX). Investing in these derivatives offers the ability to support sustainable projects that aim to “transform the economy and to deliver on climate, environmental and social sustainability goals”. (SIX, 2021) Although there are no legally binding definitions of these terms, the Swiss stock exchange follows the three ICMA principles. In addition, green bonds listed on the exchange must be included in the Green Bonds Database by the Climate Bonds Initiative (CBI).
To ensure the results are in line with a common understanding of the ESG goals, the SIX follows the three principles proposed by the International Capital Market Association (ICMA). The three core components of these principles are the use and management of proceeds, process for project evaluation and selection, and reporting. The ICMA principles seek to “support issuers in financing environmentally sound and sustainable projects that foster a net-zero emissions economy and protect the environment.” (ICMA, 2021)
Alongside following the ICMA principles, any green bond listed on the SIX must be included in the CBI Green Bonds Database. Adherence to this database is regulated by the CBI rules.
Use of the Proceeds
Looking at the main destination of the proceeds, it becomes clear that the most common projects support sustainable energy, buildings, and transportation development. As they are main sources of pollution and are of the highest interest for the public, it is easier for the issuer to reason their support. Furthermore, there is a common consensus that green bonds finance non-controversial sectors, such as mining or fossil fuels industries. This is interesting as some industries, such as steel production, are highly polluting, but can become more sustainable with additional research and development.
To give an example for what kind of projects Swiss green bonds support, there are registry entries for the Zürcher Kantonalbank Greenbond and the Credit Suisse Greenbond.
Zürcher Kantonalbank Greenbond – Amount issued: CHF 325 million
“Proceeds will be allocated to a portfolio of green loans for energy efficient buildings made up of private mortgage loans (61%), commercial real estate (25%) and housing cooperatives (14%). To be eligible, new buildings must have obtained a Minergie certificate, a 2000-Watt Area certificate, or at least an “A” in the Swiss energy performance certificate GEAK.” (CBI, 2018)
Credit Suisse Greenbond – Amount issued: CHF 500 million
“The proceeds will go towards financing or re-financing projects in the Renewable Energy (Solar), Low Carbon Buildings and Clean Transportation (Electric Vehicles) space. The framework also covers Energy Efficiency, Conservation Finance, Sustainable Waste Management, Sustainable Water Infrastructure and Circular Economy.” (CBI, 2020)
Additionally, to ensure only adequate green bonds are listed on the market, a thorough screening process is put in place. This then sets a standard for international stock exchanges to use and allows for transparent investing. Below you will find what the screening process for the Climate Bonds Initiative looks like.
To conclude, with a variety of projects to invest in and different companies to support, investors have the ability to invest in impactful bonds without too much difficulty. Furthermore, these types of bonds are becoming quite popular. With over 60 different bonds listed on the SIX alone, and over CHF 22 billion invested (SIX, 2021), they are starting to create an impact.
CBI. (2018, May). Green Bond Fact Sheet: Zürcher Kantonalbank. Climate Bonds Initiative. https://www.climatebonds.net/files/files/2018-05%20CH%20Zürcher%20Kantonalbank.pdf
CBI. (2020, May). Green Bond Fact Sheet: Credit Suisse. Climate Bonds Initiative. https://www.climatebonds.net/files/files/2020-05_CH_Credit_Suisse.pdf
ICMA. (2021, June). Green Bond Principles. International Capital Market Association ICMA. Retrieved 10 November 2021, from https://www.icmagroup.org/sustainable-finance/the-principles-guidelines-and-handbooks/green-bond-principles-gbp
Segal, T. (2021, April 24). Green Bond. Investopedia. Retrieved 10 November 2021, from https://www.investopedia.com/terms/g/green-bond.asp
SIX. (2021, July). Sustainable Bonds. Swiss Stock Exchange SIX. Retrieved 10 November 2021, from https://www.six-group.com/en/products-services/the-swiss-stock-exchange/market-data/bonds/green-bonds.html