Responsible Investing In a Traditional Asset Class

Potential benefits and risks of investing in green bonds in the municipal market.

Franklin Templeton Fixed Income

PREVIEW

In the municipal bond market, the issuance of green bonds—which are bonds issued to help fund environmentally beneficial projects—has provided an attractive solution for investors interested in socially responsible investments while also receiving the tax-exempt income benefit municipal bonds offer. In this primer, we seek to provide:

  • An overview on green bonds in the muni market (how and why they are issued) 
  • Potential benefits and risk considerations
  • Why we believe an active approach is valuable when selecting green bonds

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WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Investments in lower-rated bonds include higher risk of default and loss of principal. Changes in the credit rating of a bond, or in the credit rating or financial strength of a bond's issuer, insurer or guarantor, may affect the bond's value. Municipal bonds are debt securities issued by state and local governments and are generally exempt from federal income tax and also from state and local taxes for residents in the state where the bond was issued. They typically offer income, rather than capital appreciation potential. Corporate bonds are issued by corporations. Bonds with lower ratings and higher credit risk (risk of default) typically offer higher interest rates to compensate investors for the higher risk associated with the investment.