How green is green?

That’s the question many clients want their advisors to answer when they consider investing in green bonds, a growing channel in the fixed-income market, said William Mock, lead member of the portfolio management team for fixed-income and money market funds at Shelton Capital Management based in Denver.

Green or environmental, social and governance (ESG) investing in equities is almost mainstream at this point, but questions remain about fixed-income green investments, whether it involves government bonds or private corporate bonds, Mock said.

Advisors need to be able to outline the possibilities for clients who want to explore this market.

The “greenest” bonds are those that fund projects that have a positive impact on society, and they often involve new industries or innovative solutions to old problems.

The second tier of green bond investments would involve bond portfolios with harmful or unsustainable investments removed from them.

And the third tier is bonds that fund projects meant to improve society generally, such as education or infrastructure projects, Mock said.

“This is a relatively new field. A lot of bonds sold in the past, before there was a ‘green’ label, would be considered green if they were issued today,” he said.

Green bonds should be put under the same scrutiny as any other bond and not be given any leeway just because they promote ESG investing, Mock added. “As an investment manager, I don’t give any bonds a break in due diligence just because they are green.”

Shelton Capital Management has been a third-party manager of green bonds for advisory firms since 2012. Mock manages investments of about $130 million in green bonds.

Returns in the green bond market and the traditional bond market cross paths at some points. For instance, if oil prices go up, bonds for solar projects will be more appealing, but if oil prices are sinking, solar projects are less attractive.

Shelton holds some tiered bonds with one-to-10-year durations, but he holds most in the intermediate, three-to-four-year maturity range, he said.

The global issuance of green bonds has reached $173 billion, according to Bloomberg New Energy Finance. The United Nations’ Climate Bonds Initiative estimates that totals for 2018 will be $250 billion to $300 billion by the end of the year.

“That’s explosive growth, and advisors need to understand the nuances of the emerging fixed-income sector as new issuers come to market with a variety of new products,” said Mock.

“While green bonds are growing rapidly, the need to customize holdings can make or break a portfolio,” he added. “That’s because at this early time in the evolution of green bonds, indexing fails to capture the nuances of the green bond market.”