Green Bonds: Investor Demand, Advisor Edge Conversation with George Gay, Guy Benstead and Bill Mock

george gay, CEO, First Affirmative Financial Network – the Guy Benstead, Portfolio Bill Mock, lead member leading advisor network serving the responsible investment Manager for the Shelton Tactical of the portfolio management community overseeing more than $1B in AUM and advisement and Credit Fund and the Firm’s fixed team for Shelton’s Fixed Income working with 400+ specialist SRI advisors. He also has produced income separately managed and Money Market funds. and hosted the SRI Conference since 1990. accounts.

With an aging client base and an estimated $68 tril- manager, utilizing an active approach to fixed income port- lion in U.S. wealth expected to change hands from older folios which seek to generate total investment return and generations to younger generations (Cerulli), ESG invest- income. The firm offers mutual funds and SMA strategies for ing/investing with a purpose are growing priorities for clients seeking an environmental, green or sustainable focus. investors. Advisors need to be prepared to address these Here, George Gay delves into Shelton Capital Manage- changing investor preferences. ment’s approach to ESG and impact investing in the U.S. Shelton Capital Management is an experienced Green Bond fixed income markets, as well Green Bonds.

george: Green Bonds have an I’d also say that the most impor- labeled “Green Bonds,” projects — all kinds of projects evolving definition and are tant factor that has influenced individual investors have that have been financed in certainly defined in different us over time is direct feedback historically valued these kinds of the markets that were always ways by different investment from advisors and their clients. opportunities. It’s just become a public good, but never got managers. How does Shelton much more formal in the last defined as impact or green, per Capital define this category? george: How long has Shelton decade, and it continues to se, that now would qualify. Capital been working in this grow every year. I would say 10 bill: Shelton Capital’s simple area? And how long have years ago we started to define george: How big is the definition is a bond that uses Green Bonds been a category? things and in the last five years market now? And how fast the proceeds to make a we’ve made massive leaps is it growing? quantifiable contribution to a bill: Shelton Capital has been forward. It’s still evolving, but sustainable future. The world managing Green Bond portfolios we are coalescing around a lot guy: It’s safe to estimate that the isn’t always black or white, and since 2015. Green Bonds as a of common definitions and the new issue volume and size of that’s true for Green Bonds too. category really kind of took off market continues to grow. the market could easily double Our analysis is informed by the about 10 years ago when the every year for the next 5 to 10 Climate Bonds Initiative; the Climate Bonds Initiative and guy: And as Bill said, there have years. The demand is there, International Capital Markets the World Bank started defining been bonds that could qualify it was almost nothing 5 years Association’s green, social, and what constituted a Green Bond. for these criteria for a long, ago, and now it’s estimated to sustainable bond criteria; the But the notion of long time, particularly in the be $350B. So, the market is U.N. Principles for Responsible environmental investing has municipal bond world. growing very fast. Investing and the U.N. Sustain- been around for several There have been pollution able Development Goals. decades. Although they weren’t control facilities, public works continued on next page

MARCH 2020 george: How have you seen and corporates, which are george: In the Green Bond demographics, more women are Green Bonds perform relative to generally going to be taxable. space, what resources are going to be in control of larger the standard bonds in the same There really isn’t — beyond there for advisors to evaluate pools of assets. The statistics category? And the same thing the use of proceeds, a huge investments and how can show that women tend to on both performance and risk. distinction. Green bonds are not they use those tools to help have more socially responsible given any passes in the credit their clients? points of view when it comes guy: Well, again, the benchmarks qualifications. They are evaluated to investing, and certainly their are evolving. There are a couple from a credit perspective the bill: I’d ask them to call us, children do. of benchmarks that are prob- same way any bond would be in we’ve been managing Green Advisors ought to be, at a ably reasonable proxies. There is terms of the issuer’s ability to pay Bonds for years and we’re minimum, conversant in what the Bloomberg Barclays Global back the bond. happy to share our experience these topics are and how to Bond Index and then there’s a with advisors. I have told access them, because clients Bloomberg Barclays MSCI Global guy: I think there’s some advisors who are interested are going to ask. It’s a matter of Green Bond Index (the “Green distinctions between the in bringing themselves up to time before clients are asking. Index”). It is important to note, corporate market and the muni speed to look at the International Green Bonds are here to a lot of these are international. market. Buying bonds, we’re Capital Markets Association, stay as a decision criteria. So, to look at it just versus, the effectively creditors. So, the which has published a set of It’s wise for advisors to have Bloomberg Barclays U.S. Aggre- credit work needs to follow the criteria for green, social, and the ESG conversation in their gate Bond Index, you’re going to same underwriting integrity of sustainable bonds (https://www. arsenal, at a minimum. And they get distorted performance. risk and probability of payback icmagroup.org/green-social-and- really should have investment Green Bonds have slightly and return that’s commensurate sustainability-bonds), and the solutions available. outperformed, by about 12 basis with analyzing green or not Climate Bonds Initiative (https:// I also like to mention the points a year annualized over green; that’s just a factor. www.climatebonds.net). SRI Conference which is held the last five years. We’ve seen The bond market is accessed annually (November 9-11 lower standard deviation, similar by large borrowers, large compa- guy: Another great source of this year in Orlando, FL). return and a better risk-return nies or large municipal borrowers. information would be their own We’ve been an advocate and profile in the Green Indices over So, they may not be as an entity clients, asking clients what their supporter of that conference for the last five years.1 uniquely qualified as a “green- views are because I’ve found that years. Fortunately, I was able If you look at 2019, which compliant” or their score might there’s a variety of different views. to attend last year and it’s a was a very strong year for not be a “10.” It might be a “7” One thing that’s particularly fabulous event. Orlando will be a fixed income, the Green Index or an “8” or a “6.” But if the use important for advisors to tremendous attraction for people outperformed the Bloomberg of proceeds of the specific issue understand — is the wealth from all around the country. Barclays Global-Aggegrate Index are valid, then that’s something transfer effect over the next by 215 basis points. And year to I think that we could support. 10, 15, 20 years which will be To learn more about date, which has been extremely What we do uniquely here at going to a generation that has the conference: volatile, it’s outperforming by Shelton is we dig through both greater interest in sustainable 156 basis points. So, overall, the corporate and the muni and impact investing. But even https://www.sriconference.com/ as a proxy green bonds have world and try and identify criteria before that, just look at typically outperformed their non- that aligns with a public good. green counterparts. Then we’ll look beyond maybe the name on it. For example, PROFESSIONALLY MANAGED ASSESTS IN THE UNITED STATES (US$ TRILLION) george: What distinctions do you toll roads and managed lanes. non-ESG-mandated ESG-mandated 70 see between municipal bonds There are all kinds of reasons and high-yield taxable and why we think those qualify, 60 tax-exempt? And in the green although it’s still use of a car, it 50 $34.5 space, have you identified reduces commute time which 40 any unique or extraordinary has social benefit and less air 50% 30 $34.6 opportunities? pollution if the car is moving. $31.6 20 $30.2 I think our value-add is being $29.6 $34.5 10 bill: I would say that there are thoughtful and creative and $12.0 $6.6 $8.7 green bonds within municipals, not formulaic when it comes to 0 $3.7 2012 2014 2016 2018 2025 both taxable and tax-exempt, identifying the opportunities. source – US SIF Foundation and Deloitte Center for Financial Services Analysis

1 Comparing the Bloomberg Barclays MSCI Global Green Bond Index to the Bloomberg Barclays Global-Aggegrate Index over the previous 5 years ending March 31, 2020

Past performance is no guarantee of future results. Investments involve risks. This information has been prepared from sources believed to be reliable. The views expressed are as of the date of this writing.