The green bond market could be gaining momentum as more investors look to financing tied to climate and environmental projects, along with related exchange traded funds.
According to Bank of America Corp.’s chief Brian Moynihan, demand for green bonds is growing and should expand, Bloomberg reports.
“It’s a pretty amazing thing to see how much capital is coming in, and yet we’re just getting started,” Moynihan said at the IIF Sustainable Finance Summit. “You’re going to see a lot of action.”
Bank of America is witnessing the shifting trends as the company is an issuer and an underwriter for corporate debt issuers that are moving toward clean energy and technology.
“Companies need to issue more green bonds,” which ultimately “backs the strength of their commitment,” Moynihan added.
Furthermore, corporations can tap into the green debt market to help meet their green goals or transition to lower carbon emissions. The specialized borrowing can also pay higher rates to investors, which can attract greater demand to provide that financing, according to Moynihan.
Companies and governments around the world have raised about $94 billion in green bonds so far in 2022, according to Bloomberg data, reflecting record demand and surpassing the more than $86 billion borrowed for the same period last year.
A Clean Transition
Moynihan argued that the focus should be on companies’ commitment to the ongoing transition toward clean energy and not just the financing aspect.
“There is a mistake thinking that finance somehow controls this outcome,” Moynihan said. “Finance is going to reflect this outcome. It can help educate, advise, create deals, create activity and structure.”
ETF investors who are interested in gaining exposure to the corporate green bond market segment can turn to ETF options like the SPDR Bloomberg SASB Corporate Bond ESG Select ETF (RBND), which invests in sustainable debt. The fund tracks the Bloomberg SASB U.S. Corporate Ex-Controversies Select Index and provides a sampling strategy to generally carry the same risk and returns of the index.
The underlying index measures the performance of investment-grade corporate bonds issued by companies with certain ESG qualities that also have risk and return qualities of the parent index, the Bloomberg U.S. Corporate Index. The parent index has public-issued, fixed-rate, taxable, U.S. dollar-denominated corporate bonds. These bonds are issued by U.S. and non-U.S. industrial, utility, and financial institutions with a maturity of a year or greater and with $300 million or more of par amount outstanding.
The index uses a Responsibility (R-Factor) developed by SSGA to score companies in the parent index for ESG criteria. The R-Factor takes into account ESG and corporate governance factors when scoring companies. It excludes companies that derive significant revenue from any of the following: extreme event controversies, controversial weapons, UN Global Compact Violations, civilian firearms, thermal coal extraction, and tobacco. Companies that do not have an R-Factor in the parent index are also removed.
The securities within the index are weighted to maximize the R-Factor of the index while also minimizing total risk compared to the parent index.
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