In November, BlackRock, Deutsche Bank, State Street, Ford Motor, Microsoft and other big investors jumped at the opportunity to buy a three-year bond yielding just 0.625 percent. The $1 billion International Finance Corporation issuance led by Bank of America, Citigroup and Crédit Agricole was even heavily oversubscribed.
Why would investors be so jazzed about such a low rate of return, less than even a U.S. Treasury bill? The answer is simple: It was green.
"They are obviously very smart investors and they are after the money, but just by being associated with the asset class there's a lot of 'conscious' value," Evelyn Hartwick, head of socially responsible bond programs at IFC Treasury, said of big asset managers putting their money in so-called green bonds.
Hartwick's comments were made at the Environmental Finance Innovation Summit hosted by Goldman Sachs in New York City Thursday.
Green bonds are like other fixed income products except they invest in environmentally friendly businesses and projects, such as wind and solar power or technologies that reduce greenhouse gas emissions.
The bonds have taken off over the last year, with more than $10 billion issued in 2013 alone. There are now about $15 billion of them total, according to nonprofit Climate Bonds Initiative.
Most green bonds are from international development institutions like the IFC and World Bank and are rated AAA with returns that are close to government treasuries.
But the scope—and potential return—is expanding.
Massachusetts recently became the first U.S. state to issue a green bond. And the first set of corporate issued vehicles were launched last year by French electric utility company EDF Group, Swedish real estate company Vasakronan and Bank of America. The companies raised money like a normal debt offering but with the promise that the money would go towards environmentally friendly projects.