One of the more novel aspects of Budget 2021 was the announcement of green bonds, an eco-friendly type of financial instrument. The green bonds aim not only to help the government finance green infrastructure, but also have the goal of turning Singapore into a green finance hub.
So what exactly is this new type of bond? And can you buy them like Singapore Savings Bonds? Here are 4 burning questions we have.
1. Why are green bonds suddenly a “thing” now?
In recent years, the government seems to have gone from being non-fans of plastic bag charges to talking about turning Singapore into a leader in sustainability.
After realising that trash island Pulau Semaku was going to run out of space, the government designated 2019 the Year towards Zero Waste. This year, the government announced new measures to make buying electric cars more viable, backtracking on a previous statement about electric cars being lifestyle purchases.
The government isn’t just worried about the effect of climate change on our already overheated island. They’re also eyeing the green economy as a potential area of growth.
Over the next few decades, the government has millions of dollars worth of green infrastructure projects planned, aimed at lowering Singapore’s carbon footprint and/or helping us cope with climate change.
In order to raise cash to finance these green projects, the government has announced that they will be issuing green bonds.
The government will take the lead by issuing green bonds for public infrastructure projects, but in the long term they are hoping that Singapore will become a green finance hub, with corporate bond issuers and investors using us as a base for their transactions.
2. How exactly do green bonds work?
Green bonds are simply bonds that are used to raise money for projects considered green, eco-friendly, climate-aligned and so on.
But what on earth are “bonds”? In a nutshell, bonds are financial instruments that offer a way for governments and corporate bond issuers to raise money.
Let’s take Singapore Savings Bonds which are issued by the government, as an example. When you buy a Singapore Savings Bond, you are “giving a loan” to the government with the money paid for the bond. In exchange for borrowing your money, the government will pay you a regular interest (called a “coupon”).
Bonds have a maturity date, which is when the government needs to “return” your money. So, on the maturity date, the government will redeem the bond by paying you its value and you will stop earning interest. This might be higher or lower than the original price of the bond.
As an investor, you are therefore interested in the income you can earn through the coupon, as well as the value of the bond itself, which can enable you to earn money if you sell the bond at a higher price than you bought it.
3. What are some examples of green bonds?
Green bonds are new in Singapore, but elsewhere, government and corporate green bonds have become increasingly popular in recent years.
Here are some examples of high profile green bonds in recent years:
- World Bank’s green bonds for various green projects all over the world, such as the Rampur Hydropower Project to build infrastructure for hydroelectric power in India
- German sovereign Green bonds to finance railway infrastructure, low-carbon agriculture and more
- French sovereign Green OAT to finance the energy transition under the Paris Climate Agreement
- Belgian sovereign Green OLO to finance projects in clean transportation, energy efficiency and more
- Apple’s $2.2 billion green bond to help the company reduce its carbon footprint, use greener materials and conserve resources
- Toyota’s $750 million green bond to fund greener vehicles
Green bonds can be issued by governments, corporate entities and even organisations like the World Bank. As you can see, even companies that one wouldn’t really consider eco-friendly can issue green bonds in order to finance climate-friendly projects.
Singapore’s first green bonds will likely be for financing Tuas Nexus, a new integrated water and solid waste treatment facility in Tuas.
Looking at the list of global green bonds, we’re guessing that there might also be Singapore green bonds for public transport projects, electric vehicle infrastructure, and maybe even sustainable urban farming.
4. Can retail investors buy green bonds?
Green bonds are usually traded by institutional investors, such as fund managers or high net-worth individuals — not retail investors, i.e. normal people.
That being said, you can still invest in some green bonds and ETFs on overseas markets.
For instance, there are many Clean Energy ETFs that can be traded on US exchanges. The largest one isiShares Global Clean Energy ETF, which tracks 30 clean energy stocks. However, it’s also got a much higher expense ratio than a generic market-index fund like an S&P 500 ETF.
At the moment, there isn’t much information about the Singapore government’s green bonds, but there is a chance that they will only be open to institutional investors. If you want to buy Singapore green bonds, your best bet is to look out for green funds or ETFs with exposure to them.
As the green bond market in Singapore expands and more bond issuers flock here, it is likely that there will be more choices open to retail investors.
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