Kermit the Frog famously said “It's not easy being green,” but when it comes to making green investments we’d have to disagree. Green debt is a quickly emerging investment product that helps finance renewable energy projects.
The most popular of these are AAA rated World Bank Green Bonds, but unfortunately these are inaccessible to most investors. Mosaic Notes are another green debt product that offer the advantages of green debt to average investors. Here are three reasons green debt products are making it easy to be green.
1. Green debt products are less risky than green equities
By anticipating the trend of growing renewable energy generation, some investors have seen the writing on the wall and have made very successful bets on companies like Tesla (Nasdaq: TSLA) and Solar City (Nasdaq: SCTY). For every success story, though, there are other companies such as those in the manufacturing sector that have suffered and declared bankruptcy.
Investing equity in any emerging industry including solar remains a risky business, but green bonds and solar debt products used to finance renewable energy projects have much lower risk. Debt has seniority in the capital structure over equity stakeholders, meaning debt-holders get paid first and get preferential claim on the assets compared to equity stakeholders during bankruptcy. Because of this added security, debt products often yield less than equity investments, but that doesn’t mean the return isn’t good for the risk being taken.
[pagebreak]Mosaic Notes yielding 4.5% outperform other debt products like corporate bonds that yield on average only 2.8%. Although green debt may not triple your original investment, it will dramatically reduce your risk of striking out and losing everything while giving you a respectable return–something you can bank on in the future.
2. Green debt products can serve as a climate hedge
Last month we reported how stock investments in fossil fuels companies could lose 50-60% of their value if governments stick to plans to prevent the global temperature from rising 2° Celsius. This concern has already encouraged some large investors like Norwegian pension and insurance giant Storebrand to divest from fossil fuels.
This does not necessarily mean, however, that you should run to your broker and sell all your shares of ExxonMobil. Instead, you should consider limiting your exposure to fossil fuels and start investing in companies and products that stand to benefit from the transition to clean energy. HSBC believes that to maintain climate goals, renewables would have to meet approximately 67% of world energy demand up from around 10% today.
If governments are serious about meeting their goals, there will need to be massive reallocation of capital towards green industries. This would create tremendous amounts of growth in clean energy businesses while the fossil fuel industry suffers.
3. Green debt products provide a low beta to avoid overall stock market risk
Everyone with assets invested in the stock market is worried that there could be a repeat of 2008, or 2000, or 1987, or 1929. Crashes have happened historically and are likely to happen again. A way to minimize losses when this does occur is to add low beta and stable debt products that are uncorrelated to market volatility to protect your portfolio.
Beta is a measurement of volatility that compares returns to an index like the S&P 500. Mosaic Notes and green bonds have a beta of almost zero, meaning their returns are unrelated to the performance of the market.
Together, these traits make green debt products a valuable addition to any balanced portfolio. They allow investors to avoid the risks associated with the stock market while earning predictable returns. There is also the bonus that green debt investments are good for the environment and fund the transition to the clean energy economy, making it both smart and easy to be green.
Disclaimer: Any opinions expressed herein by persons not affiliated with Mosaic reflect the judgment of the author and not necessarily that of Mosaic. Nothing herein shall constitute or be construed as an offering of securities, or as investment advice or recommendations by Mosaic. Mosaic's investments are limited to investors who meet applicable suitability standards based on income, net assets and state of residence. Please click here to learn more.