Bond’ is a commonly used term in finance, and they offer an effective way to diversify an investment portfolio. But can you explain what a bond is? The term isn’t self-explanatory, so we’ve laid out the basics below.
By the time you’ve read this, you’ll be able to explain what a bond is and why you might choose to invest in one.
What is a bond?
We love how Sharesies describes a bond as ‘a really big loan’.
Sometimes governments or companies are more relatable than you’d expect; for instance, there are times when they want something they can’t afford and need a loan to complete the purchase.
If you needed money, you’d maybe use a credit card or get a loan from a bank. You might even borrow money from friends or family. But companies and governments are often looking for sums far larger than mum and dad can help with, think upwards of hundreds of millions of dollars.
So instead of borrowing money from one person or place, they borrow smaller amounts from lots of people. Bond is the name given to this collective loan.
How bonds work:
Imagine a company wanted to raise $1 million to build a wind farm. They could create x1000 bonds and sell them each for $1,000 to get the $1 million. The company decides how long the lifecycle of the bond will be before it matures (finishes) and they have to pay everyone back.
Like a loan, anyone who buys a bond will get interest paid from the company, every year. The bond could mature in 30 years, and you could get 5% interest every year, which means you’d get $50 every year.
Then, after 30 years, you also get your $1000 back.
In total, you would have waited 30 years, spent $1000, made $1,500 in interest and got your initial $1,000 back, meaning you’d walk away with $2,500.
You don’t have to hold onto your bond for the full 30 years either; you could sell it before then, but whoever buys it will get your original investment back when the bond matures. If a company runs out of money however, it will not be able to pay the bonds back. The amount of interest the bond pays is one indicator of the level of risk involved.
Bonds vs Stocks
Bonds can be more predictable, especially when you buy them from reliable sources, governments for instance don’t often run out of money to pay you back. And you get what’s on the tin: the interest and the original amount back. Compared to stocks there’s less risk but consequently, no potential for earning more than you expected.
However, like all investment's bonds have a level of risk, you aren’t guaranteed to make money and you might lose the money you started with.
What is a ‘green bond’ and the Green Bond Fund?
A green bond is generated to raise capital to undertake a task related to improving the environment or positively impacting climate change.
Our Green Bond Fund was the first dedicated to green projects in NZ – it enables investors to effect meaningful change by investing in international bonds that fund green purposes like clean transportation, clean water access, increasing resilience to extreme weather events and renewable energy supply networks.
Examples of projects being undertaken thanks to the Green Bond Fund
The National Solar Park Project in Cambodia:
This project that will support the construction of solar photovoltaic power plants in Cambodia, and address the country's need to:
Expand low-cost power generation.
Diversify the power generation mix and increase the percentage of clean energy in its generation mix in line with its stated greenhouse gas emissions reductions targets.
Expand the use of competitive tenders and other global best practices in the sector.
The project is the first of its kind in Cambodia and aims to avoid 140,000 tonnes of CO2 emissions entering the atmosphere annually. The project is currently at the partially active stage and is being developed in multiple phases.
Seagreen Wind Energy
Seagreen is one of the world’s biggest offshore wind farms. First power was achieved in August 2022, and it became fully operational in October 2023. Annual power production is projected at 5,210 GWh - enough to power around 1.6 million households and save 2 million tons of CO2 emissions annually. Located 27km from the Angus Coast in Scotland, its visual impact is considered minimal. The project has also added economic benefit to the local, regional and national economy and includes a community benefit fund.
What are the benefits of investing in the Green Bond Fund?
You get to directly support climate positive initiatives.
You’re invested in a lower risk fund for potentially more steady returns.
You’re voting with your investment wallet for a more sustainable world.
Join Anna Stuck, the person who helped bring this fund to life:
The Green Bond Fund was seeded with a substantial investment from New Zealand-based social entrepreneur and philanthropist, Anna Stuck.
“Having a positive impact on climate change at a global scale through the most progressive Green Bond Fund in New Zealand was very attractive to me as an investor,” says Stuck. “It’s an incredible opportunity for Kiwis to get behind initiatives with tangible results that will make a difference for generations to come.”
The Green Bond Fund was the winner of Mindful Money's Best Ethical New Fund 2023.
How do I invest?
We offer direct investment in the Green Bond Fund as part of our managed funds, there is a minimum investment of $5,000. But if you’re a Pathfinder KiwiSaver Plan member, you can invest for half that ($2,500).
If you think Green Bonds might be a good option, we always recommend getting some financial advice. Please contact us to talk to an expert free of charge. We are always happy to help.
All our KiwiSaver Funds and our Ethical Growth Fund have a portion invested in the Green Bond Fund..
Note: Pathfinder partners with London-based sustainable bond specialist MetLife Investment Management (formally) Affirmative Investment Management) to help select the green bonds. Metlife is recognised as a Responsible Investment Leader by the Responsible Investment Association Australasia (RIAA) and was also the only asset manager out of 31 assessed by Morningstar to be awarded an ESG commitment level of “Leader”.
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References
Cambodia's National Solar Park adds 60 MW to grid (solarmagazine.com)
Power plant profile: Cambodia National Solar PV Park, Cambodia (power-technology.com)
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Disclaimer
Past performance is not an indicator of future returns. This article is not intended to be used as financial advice and we recommend that you seek financial advice before making investment decisions. Pathfinder Asset Management Limited is the issuer of the Pathfinder KiwiSaver Plan and Pathfinder Investment Funds. Product Disclosure Statements for the offers are available at pathfinder.kiwi
