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I spent last week watching Bloomberg's virtual Green Festival where there was a lot of talk about how to finance the clean energy projects of the future. We want to see a transition to a clean economy, but how can these projects get the financing they need? So I asked Bryce Anderson from RE Royalties how retail investors can help finance renewable energy projects. Although there are many ways to invest in clean energy, here we dig deep into what green bonds are, how they work, and why they're important.
Bryce is a mechanical engineer and the Vice President of Investments at RE Royalties Ltd., My interview with him is below. The questions are mine, the answers are his. It's been edited for clarity and space. None of what you read below should be seen as investment advice (read full disclosure below).
What are green bonds?
Green bonds provide investors with the opportunity to directly invest in fighting climate change while offering a fixed return. The bonds can also provide greater security with lower risk than equity investments, such as publicly-traded stocks. Green bonds were originally created by the World Bank in 2008 to appeal to large investors, such as pension funds. These bonds were intended to provide investors with the comfort and knowledge that their investment was making a positive impact on the environment.
There have been several green bond issuances since then that have been targeted towards these larger investors. But, sadly, there were very few issuances aimed at retail investor participation. In the last few years, retail investors have made their voices heard, showing a massive appetite for impact investments such as green bonds. Unfortunately, the supply of impact products is still a long way from meeting the demand, which is why we decided to create our own green bond offering.
RE Royalties first investment – a wind farm in Northern British Columbia, Canada
How do green bonds work?
A bond is essentially a loan from one party to another with a fixed term and interest rate. For example, as a green bond investor, you would loan RE Royalties $5,000 for 5 years. During those 5 years, you would receive an annual return of 6%, or $300 in interest per year. At the end of the five years, you would also receive your $5,000 back. During this time, we would take your money and invest it in renewable energy projects (wind, solar, hydro, etc.) that offset greenhouse gas emissions and provide us with a high enough return to satisfy our interest payments to you as a bondholder.
What are the differences between green bonds and traditional bonds?
As a traditional bond investor, you generally have very little control over what your money is being used for. For example, you could buy a bond from Apple, but they might give a very generic answer as to what the proceeds will be used for, such as “general corporate purposes.” The money could be used to pay dividends, buy shares, or even replace other debt that the company has outstanding. Green bonds are different. In order to qualify as a legitimate green bond, the issuer will create a document called a “Green Bond Framework” that summarizes the following:
1. Use of Proceeds – outlines exactly which environmental issues the bond proceeds address.
2. Process for Project Evaluation and Selection – describes how they will analyze and select projects to fund that meet the above criteria.
3. Management of Proceeds – explains where the funds from the bond issuance will be held in order to ensure they are only used for projects that pass the screening.
4. Reporting – clarifies exactly what metrics the company will be using to measure the impact of the projects invested in (such as greenhouse gas emissions reduced/avoided) and how they will be communicated to investors.
Issuers will also commission an independent auditor to verify that all the funds were used properly and in accordance with the green bond framework in order to provide further comfort for investors. Based on all of this, you can see that green bonds offer much more transparency and control into how or where the funds will be used.
What is the best way to invest in renewable energy projects?
Great question. I would say it primarily depends on how much capital you have to invest. For the most part, the renewable energy industry has been dominated by large investors that are able to invest tens to hundreds of millions of dollars into massive projects. This meant that, as a retail investor, you would not be able to participate unless you bought shares in a large publicly-traded corporation that then pooled your capital along with others to invest in these projects. The problem with that is that a lot of these publicly-traded companies are not solely focused on renewables. A fair amount of them also invest in fossil fuel generation and other infrastructure projects that actually contribute to the climate change problem rather than fighting it. Even worse, they may change their business strategy and decide to sell off their renewable energy assets, which would be completely out of your control as a retail shareholder.
For the average investor, that leaves green bonds, which provide more transparency and comfort that the money is being used for the purposes you want it to then you would ever be able to get with other investments.
Wind Farm in Nova Scotia that's part of RE Royalties portfolio.
Why are green bonds important for the environment?
Fighting climate change is going to require a lot of money, and green bonds provide a capital solution that is attractive to both issuers and investors. For issuers, the increased transparency and positive environmental benefits can help them attract additional funds, often at a lower price. For investors, they can feel good about what their money is being used for while also making a solid return.
Are green bonds a good investment?
It depends on your risk profile and investment goals. Bonds (often referred to as fixed income) are typically perceived as a less risky investment than buying shares, or equity, of a company. They also provide a fixed return, unlike equity, and can offer increased security as well. So, for an investor who wants a stable return with potentially lower risk, and wants to know that their money is being used to directly fight climate change, green bonds could be an excellent option – especially during times of such uncertain economic conditions.
How big is the green bond market around the world?
As I mentioned previously, the green bond market has only been around for a little over a decade, but, despite that, over $255 billion USD in green bonds were issued in 2019, which was a 51% jump over 2018. I only see the market growing as more investors learn about the benefits of green bonds and companies offer new issuances that are accessible to retail investors.
Why was RE Royalties founded?
RE Royalties was founded in 2015 with a simple goal: grow the renewable energy economy by acting as a conduit between those wanting to invest in the space and renewable energy leaders who need capital. Put another way, we invest in renewable energy projects using money from our investors to create a cleaner future while also providing our investors with strong returns. We saw the opportunity to bridge the gap that existed between innovation in the finance industry and renewable energy and wanted to provide the average investor with ways to directly invest in renewable projects. So, we decided to create a company that allows them to do just that.
What kinds of projects does RE Royalties finance with their green bonds?
To date, we have provided financing for over 85 solar, wind and small hydro projects around the world.
Where are the projects located that RE Royalties finances with their green bonds?
To date our projects are quite spread out globally, with several in provinces across Canada (British Columbia, Ontario and Nova Scotia), Texas and Eastern Europe.
What is the minimum investment in RE Royalties green bonds?
Our minimum investment is set at $5,000 CAD but, depending on your legal jurisdiction and brokerage, it may be higher.
What return can RE Royalties investors expect?
Our green bonds offer a fixed 6% annual return for 5 years. For comparison, as of September 9th, 2020, the current Government of Canada 5-year bond yield is 0.37% and the US Federal Reserve 5-year bond yield is 0.28%.
Who can invest in RE Royalties green bonds?
RE Royalties’ green bonds provide different types of investors with opportunities to invest with impact. They are available to investors in non-registered or registered accounts across Canada. Those interested can sign up on our green bond registration list on our website to receive more information.
Disclaimer: The information herein has been provided for information purposes only and is not intended to serve as investment advice or as a recommendation for the purchase or sale of any security. The information herein is not specific to any individual’s personal circumstances. The strategies and/or investments referenced may not be suitable for all investors as the appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. While the information herein has been obtained from publicly available sources which the Author believes to be reliable; The Author cannot and does not guarantee the accuracy, adequacy or completeness of any such information. The information herein may change from time to time without notice, and the Author has no obligation to update this material. The Author does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional.
All investments involve risk, including loss of principal invested. Past performance does not guarantee future performance. Individual client accounts may vary. The strategies and/or investments referenced may not be suitable for all investors as the appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.
