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New Waves: The ESG Megatrend Meets Green Bonds

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Rise of Responsible ESG Investing

New Waves: The ESG Megatrend Meets Green Bonds

It’s clear that sustainable investing has been thrown into the limelight.

Increasingly, investors are seeing both the financial and social imperative for sustainable investing. In particular, the rapid growth of green bonds—a fixed income investment that is designed to raise funds for the climate or environment—is booming.

The above infographic from Raconteur navigates the growing green bond market against the backdrop of the broader ESG (environmental, social, and governance) investing shift.

Gathering Steam

By the end of 2020, $45 trillion in assets will adhere to sustainable practices, including ESG principles.

Despite the loss of confidence from COVID-19, investors flocked to sustainable-focused funds.In fact, global fund flows hit record levels for Q2 of 2020—surpassing $71 billion.

The fund flows are not without financial warrant. Between April 2015 and April 2019, average returns of socially responsible investments (SRI) outperformed their non-SRI peers. At the same time, 94% of sustainable indices realized stronger returns than their benchmarks between January and March 2020.

The accelerating demand for sustainable investments may seem like old news, but green bonds offer a new avenue.

What Are Green Bonds?

Green bonds raise money for climate and environmental projects, and are issued by governments, corporations, and financial institutions.

Multilateral development banks, which include the European Investment Bank and the World Bank, initially brought them to market in 2007, though they had a slow start. However, in 2019, new issues of green bonds topped $258 billion worldwide—jumping 51% in one year.

Across the green bond market there is a broad spectrum of different debt instruments. These include private placements, covered bonds, and green loans.

Green private placements occur when the sale of bonds are made to private investors, rather than through public offerings. Green covered bonds, on the other hand, are bonds that are backed by a group of assets that are sustainably-focused. Green loans are forms of loans that are meant to finance green projects.

Overall, green bonds can be diversified across a number of different sectors.

The Top Purposes for Green Bonds

What are the top sectors for green bond issuance?

Category20152019
Alternative energy$30.4B$143.8B
Green building$10.7B$63.5B
Sustainable transport$3.7B$58.7B
Energy efficiency$9.5B$47.6B
Sustainable water$3.1B$23.8B
Pollution prevention$1.4B$18.1B
Climate adaptation$1.8B$15.0B
Sustainable forestry/agriculture$1.1B$11.3B

Source: MSCI

Alternative energy, accounting for over $143 billion in green bonds, outpaces all other sectors by a wide margin. Within four years, renewable energy bond issuance has more than quadrupled.

Meanwhile, green building bonds are garnering attention. These instruments finance the construction of energy efficient buildings. Within the industry, a notable green building certification system is the LEED standard, also internationally recognized. Often, real estate investment trusts (REITs) are involved in issuing green building bonds.

Interestingly, Big Tech is also becoming more active within the green bond landscape. Google’s parent company, Alphabet, has issued a record $5.8 billion in corporate sustainability bonds to fund everything from energy efficiency projects to affordable housing.

The Top 10 Countries for Green Bonds

On a country-by-country level, green bonds are most common in the U.S., China, and France.

RankCountryGreen Bond Issuance2018-2019 Change (Amount)
1🇺🇸U.S.$50.6B44%
2🇨🇳China$30.1B1%
3🇫🇷France$29.5B113%
4🇩🇪Germany$18.7B144%
5🇳🇱Netherlands$15.1B105%
6🇸🇪Sweden$10.3B66%
7🇯🇵Japan$7.2B73%
8🇨🇦Canada$7B63%
9🇮🇹Italy$6.8B128%
10🇪🇸Spain$6.5B3%
Top 10 Total$181.8B49%

Source: Climate Bonds Initiative

Germany issued its first multi-billion dollar government green bonds in just 2019. One catalyst behind this was the European Central Bank’s announcement that the environment would become a “mission critical” priority going forward.

This may contribute to the fact that both Germany and France saw the biggest change between 2018 and 2019.

Opening the Floodgates

As sustainable investing becomes front and center on the global agenda, questions about its impact on returns have arisen.

During times of both extreme exuberance and market crisis, companies with higher sustainability ratings have outperformed their respective benchmark. However, there is still a long way to go. Even with the record issuance of green bonds in 2019, they make up just 3% of all global bonds issued.

As demand for sustainable investments quickly grows, could it spell a watershed decade ahead for green bonds?

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Environment

The Most Polluted Cities in the U.S.

What are the most polluted cities in the U.S. according to data from the American Lung Association’s 2024 State of the Air Report?

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Teaser image for an infographic showing the most polluted cities in the U.S. according to the American Lung Association's 2024 State of the Air report.

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The following content is sponsored by National Public Utilities Council

The Most Polluted U.S. Cities in 2024

According to the World Health Organization, air pollution is responsible for 7 million deaths annually, and could cost the global economy between $18–25 trillion by 2060 in annual welfare costs, or roughly 4–6% of world GDP.

And with predictions that 7 in 10 people will make their homes in urban centers by mid-century, cities are fast becoming one of the frontlines in the global effort to clear the air.

In this visualization, we use 2024 data from the State of the Air report from the American Lung Association to show the most polluted cities in the United States.

What is Air Pollution?

Air pollution is a complex mixture of gases, particles, and liquid droplets and can have a variety of sources, including wildfires and cookstoves in rural areas, and road dust and diesel exhaust in cities. 

There are a few kinds of air pollution that are especially bad for human health, including ozone and carbon monoxide, but here we’re concerned with fine particulate matter that is smaller than 2.5 microns, or PM2.5 for short. 

The reason for the focus is because at that small size, particulate matter can penetrate the bloodstream and cause all manner of havoc, including cardiovascular disease, lung cancer, and chronic pulmonary disease. 

The American Lung Association has set an annual average guideline of 9 µg/m³ for PM2.5, however, the World Health Organization has set a much more stringent limit of 5 µg/m³.

The 21 Worst Polluted Cities in the U.S.

Here are the top 21 most polluted cities in the U.S., according to their annual average PM2.5 concentrations:

RankCity, StateAnnual average concentration, 2020-2022 (µg/m3)
1Bakersfield, CA18.8
2Visalia, CA18.4
3Fresno, CA17.5
4Eugene, OR14.7
5Bay Area, CA14.3
6Los Angeles, CA14.0
7Sacramento, CA13.8
8Medford, OR13.5
9Phoenix, AZ12.4
10Fairbanks, AK12.2
11Indianapolis, IN11.9
12Yakima, WA11.8
13Detroit, MI11.7
T14Chico, CA11.6
T14Spokane, WA11.6
15Houston, TX11.4
16El Centro, CA11.1
17Reno, NV11.0
18Pittsburgh, PA10.9
T19Kansas City, KS10.8
T19Las Vegas, NV10.8

Note: The American Lung Association uses Core Based Statistical Areas in its city and county rankings, which have been shortened here to the area’s principal city, or metro area in the case of the Bay Area, CA.

Six of the top seven cities are in California, and four in the state’s Central Valley, a 450-mile flat valley that runs parallel to the Pacific coast, and bordered by the Coast and Sierra Nevada mountain ranges. As a result, when pollution from the big population centers on the coast is carried inland by the wind—cities #5 and #6 on the list—it tends to get trapped in the valley. 

Bakersfield (#1), Visalia (#2), and Fresno (#3) are located at the drier and hotter southern end of the valley, which is worse for air quality. The top three local sources of PM2.5 emissions in 2023 were farms (20%), forest management / agricultural waste burning (20%), and road dust (14%). 

Benefit to Economy

While the health impacts are generally well understood, less well known are the economic impacts.

Low air quality negatively affects worker productivity, increases absenteeism, and adds both direct and indirect health care costs. But the flip side of that equation is that improving air quality has measurable impacts to the wider economy. The EPA published a study that calculated the economic benefits of each metric ton of particulate matter that didn’t end up in the atmosphere, broken down by sector. 

SectorBenefits per metric ton
Residential Woodstoves$429,220
Refineries$333,938
Industrial Boilers$174,229
Oil and Natural Gas Transmission$125,227
Electricity Generating Units$124,319
Oil and Natural Gas$88,838

At the same time, the EPA recently updated a cost-benefit analysis of the Clean Air Act, the main piece of federal legislation governing air quality, and found that between 1990 and 2020 it cost the economy roughly $65 billion, but also provided $2 trillion in benefits

Benefit to Business

But that’s at the macroeconomic level, so what about for individual businesses?

For one, employees like to breathe clean air and will choose to work somewhere else, given a choice. A 2022 Deloitte case study revealed that nearly 70% of highly-skilled workers said air quality was a significant factor in choosing which city to live and work in.

At the same time, air quality can impact employer-sponsored health care premiums, by reducing the overall health of the risk pool. And since insurance premiums averaged $7,590 per year in 2022 for a single employee, and rose to $21,931 for a family, that can add up fast. 

Consumers are also putting their purchase decisions through a green lens, while ESG, triple-bottom-line, and impact investing are putting the environment front and center for many investors.

And if the carrot isn’t enough for some businesses, there is the stick. The EPA recently gave vehicle engine manufacturer Cummins nearly two billion reasons to help improve air quality, in a settlement the agency is calling “the largest civil penalty in the history of the Clean Air Act and the second largest environmental penalty ever.”

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