Making informed investment decisions is important. We’re talking about your hard-earned savings after all! There’s a universe of options out there, but not all investment opportunities are for everyone and making good choices starts with thinking about what you want from your money.
It’s not just about comparing interest rates alone. You’ll want to think about what other factors are important to you, for example, how easy it will be to access your money when you need it, how much risk you’re comfortable taking, or the positive impact you want to have.
As you consider whether CoPower Green Bonds are a fit for your portfolio, we thought you might be interested in learning about some of their core features and how they stack up to other investment opportunities.
Where do Green Bonds fit in?
To understand what to compare them to, let’s first take a step back and look at the role Green Bonds can play in a diversified portfolio.
CoPower Green Bonds are a fixed income investment, offering a fixed return to be paid on a regular schedule, in our case we pay quarterly distributions that add up to 5% interest annually on our 6-year Green Bond.
The bonds are backed by a diversified portfolio of loans to clean energy projects that use proven technologies. Returns come from the steady revenues generated by the sale of clean energy or from energy savings as laid out in contracts with counterparties (the end payer for energy or energy services) where the risk is low to moderate like a government or a diversified pool of counterparties, such as a pool of condo corporations.
They’re also a private investment, meaning they don’t trade on the public markets. The advantage here is that they don’t fluctuate in value when public markets are bumpy.
Furthermore, private investments can’t be redeemed until the end of the term and we advise investors to be comfortable holding their bonds for their chosen 4 or 6-year term. It's important to note that private issuers aren’t subject to the same disclosure laws as public companies, so investors have less information to go on when making a private investment.
Finally, as an impact investment, our bonds aim to generate market-rate financial returns as well as positive impact, in this case, carbon emissions reductions. We provide investors with transparent impact reports alongside financial reports.
So how do Green Bonds compare to other fixed income investments?
We’ve used Ratehub.ca to make some of the following comparisons with several popular investments options. Ratehub is an online tool that helps millions of Canadians compare thousands of financial products including mortgages, credit cards, savings accounts, GICs, TFSAs, RRSPs, and insurance products.
*Yield: Yield to Maturity was used as the interest rate for Bank of Canada bonds, Ontario bonds, iShares Canadian Universe Bond ETF. Horizon Active High Yield Bond ETF uses estimated annual yield. GIC’s and CoPower Green Bonds offer a fixed rate that does not change for the duration of the investment.
**Liquid: Refers to how easily the investment is converted into cash. A checkmark means the investment trades daily and can be bought and sold easily.
The terms of the various investment products referred to in this blog post are provided for illustrative purposes and may have changed since the date of publication. Please consult a professional investment advisor or contact the issuer of the investment products directly for up-to-date information.
High Interest Savings Account
High interest savings accounts are worth mentioning as an alternative to an investment product. As you might expect from the name, a high interest savings account pays a higher interest rate than a regular savings account. While they generally won’t offer as high a return as an investment product, they offer you the convenience and flexibility to withdraw and make deposits as you wish.
For impact-minded investors, it’s good to remember that banks use your deposits to fund their other investments, which may include companies or projects you’d prefer not to support.
A government bond is essentially an IOU from the government. An investor can purchase a bond issued by the federal, provincial or municipal government, and that entity pledges to pay the principal back plus interest over a fixed period of time.
Bank of Canada bonds are among the most secure fixed income investments a Canadian can purchase. The Bank of Canada issues tens of billions of dollars in bonds each year, with maturities generally ranging from one to ten years. Backed by the Government of Canada, the risk these bonds will default is low. And because they trade daily they offer high liquidity, in other words, you can buy and sell them easily.
Moving slightly higher on the risk/return spectrum would be a bond issued by a provincial government. Provincial governments are smaller in size, so they do have higher credit risk, but overall, the risk of a provincial government defaulting is still very low.
Because they trade on public bond markets, government bonds do fluctuate in value. While the interest rate stays constant, the price to purchase the bond may vary. For example, on the date of publication, a 1.75%, 5-year Bank of Canada Bond is trading at $98.40, meaning for every $100 of principal you’re getting a $1.60 discount to compensate you for a lower coupon, equating to an annual yield of 2.11%.
Guaranteed Investment Certificates (GICs)
A Guaranteed Investment Certificate or GIC gives you the ability to save and earn interest on your investment over a fixed period of time while offering the security of a guarantee on both your principal and interest. GICs are generally required to have insurance from the Canadian Deposit Insurance Corporation (CDIC) up to $100,000.
For investors looking for a conservative option, the benefit of the guarantee can be worth the lower return, generally between 1.5 to 3.5% at present.
There are a variety of factors that will influence the GIC’s interest rate further. Some GICs are redeemable, in other words you can cash out when needed, a benefit for which you’ll generally accept a lower payout. Similarly, for the benefit of reducing your tax bill, a GIC that can be held in a registered account like an RRSP or TFSA will likely offer lower returns than those held in non-registered accounts.
To understand these dynamics, check out Ratehub.ca’s GIC rates and comparisons tool.
Fixed Income ETFs
A fixed income ETF will pool together a variety of bonds to replicate an index. One of the most common is the iShares Canadian Corporate Bond ETF that currently offers an annual yield of 3.03%. Investors should note that ETFs will generally charge a management fee. In the case of the iShares Canadian Corporate Bond ETF, you’re looking at a management fee of 0.4%.
Depending on one’s preferences, ETFs can be a great investment option for investors who want to gain exposure to a market or asset class, such as fixed income, without the hassle and fees that may come with purchasing individual bonds.
High yield corporate bonds
A corporate bond is generally backed by the balance sheet of the issuing company. Investors in corporate bonds are expressing confidence that the issuer will be in a strong enough position financially to repay investors at the end of the bond term. High yield issuers have a higher chance of default than investment-grade issuers; therefore, they must entice investors to purchase their bonds by compensating them through a higher yield for exposure to additional risk.
Similarly, you could purchase a high yield bond ETF for example the Horizon’s High Yield ETF, a diversified portfolio of North American high yield debt with an average credit rating of BB- that currently offers an annual yield of 6.03% .
Stock market investments
It’s worth mentioning that fixed income investments like those listed above will likely only make up a portion of a diversified portfolio. Many investors also own stock market investments. These can include individual company stock, for example, owning a tiny equity share in Apple or Google, or a mutual fund or ETF that pools together a diversified selection of stocks exposing you to a broader segment of the market.
The value of stock markets investments vary greatly, but their return lacks any guarantee. Take for example General Electric (GE), the American conglomerate and household name known for its airplane engines, health care and energy division. Once the world’s largest company by market value, GE is now struggling to restructure and has lost over $100 billion of shareholder wealth since June 2017.
In return for this volatility and risk; however, stock market investments also offer the potential for a high rate of return. Other benefits include high levels of liquidity -- stocks can generally easily be sold on public markets -- and ease of holding them in registered accounts.
Choose wisely and seek advice
At CoPower we talk about the importance of investing with eyes wide open. At the end of the day it comes down to understanding your own goals, preferences and beliefs, learning about the opportunities available to you and choosing investments products that fit. GICs, government bonds, green bonds and company stock can all be good investment options, but it’s up to you to decide how best to invest your money.
Disclaimer: This blog post does not constitute investment advice or an investment recommendation. Please seek independent professional investment advice when choosing investments for your portfolio.