Going Green in Munis - For the Right Reasons

In building a truly diversified portfolio, you may sometimes want to include personal values in your choices. And if you invest in municipal bonds you can feel confident about supporting the social good, because the proceeds often go to broad civic investments, such as infrastructure, schools and health care facilities.

To observe Earth Day 2015, look at how green bonds may expand the opportunities available to fixed income investors who want to help encourage environmental responsibility.

The cornerstone of a green bond is the use of its proceeds. The Green Bond Principles (GBP) recognize the following broad categories of Green Projects:

These principles recommend that all designated Green Project categories provide clear environmental benefits that can be described, assessed, and quantified. The GBP was written to assist underwriters and issuers to move toward a standard disclosure that will facilitate transactions. RBC Capital Markets is one of the 25 investment banking firms to have signed onto the GBP.

Since the first “green” municipal bond deal in 2013, issuance has increased slowly and they represent a small part of the municipal bond market. However, with growing general demand for municipals – and ongoing investor interest in “green” or socially responsible investing – issuance may increase.

Green bonds may be attractive because they allow you to enjoy social and environmental returns, as well as financial returns. It is important however to evaluate green bonds, whether taxable or tax exempt, as you would any other investment in terms of risks and returns. It is equally important to recognize that socially responsible investment status in and of itself does not guarantee superior returns.

To date, tax exempt Green Bond issuance has not been large enough to build a diversified Green Bond-only fund. So performance is difficult to track. However, The Bond Buyer reports that returns of funds with green bonds have lagged those of similar non-green funds. Furthermore, it reports secondary market activity has been inconsistent with yields higher or lower than market.

Supporting environmental causes is great philanthropy. And you may have a keen eye for spotting opportune investments. But be pragmatic in your approach to environmentally responsible investing. The trick is finding the right balance between your ideals and financial goals. For professional help, contact your RBC Wealth Management financial advisor today for assistance or use the advisor locator tool to find an advisor near you.

Important disclosure information about Royal Bank of Canada (RBC) and RBC Capital Markets, LLC