Investors can capitalize on the growing Chinese green bond market with an upcoming exchange traded fund strategy.
In the recent webcast, Green Bonds: Inside China’s Playbook For Battling Climate Change, Justin Lowry, president and CIO of Global Beta Advisors, notes that over the past five years, global issuance of green bonds has soared. While the U.S. has been the leader in green bond issuances with over $180 billion in green bonds issued over the past five years, China is now third with nearly $100 billion in green bond issuances.
“The green bond space is expected to continue its rapid growth, and we believe China could take the lead, given its carbon neutrality goals and the level of fossil fuels the country consumes, particularly relative to the rest of the world,” Lowry said.
There was a huge jump in green bond issuances in 2021, following the global health pandemic, with a greater emphasis on environmental, social, and governance, or ESG, principles. While the U.S. has consistently been the world leader in green bond issuances, China is catching up and had the largest percentage growth in issuances from the amount issued in 2020 to the amount issued in 2021.
“Increased investor demand stemmed from concerns over climate change have increased supply of green bonds. We expect this trend to become permanent as more nations work towards reducing their carbon footprint and build alternative energy solutions,” Lowry said.
Looking ahead, China will focus on achieving its environmentally friendly goals as the emerging economy tries to tackle greater pollution from its quick economic expansion. The majority of China’s energy consumption comes from coal. Roughly 80% of the country’s energy consumption comes from coal and oil. China accounts for over half (55%) of the world’s consumption of coal.
China’s President Xi Jinping previously announced that China plans to peak its carbon footprint by 2030 with the plan to be carbon-neutral by 2060. Consequently, China will be making substantial investments and providing incentives to local corporations that finance investments into hydrogen-based energy solutions, carbon capture and storage solutions, and wind and solar power solutions. According to Credit Suisse, China is expected to need to spend $20 trillion over the next 40 years to achieve net zero carbon emissions.
“Because China is making a financial commitment to green projects, we believe this creates immense opportunity for green bonds in general,” Lowry said.
Lowry argued that despite a low supply of green bonds, the market has yet to observe “greenium,” or price premium, by virtue of being a green bond, over the rest of the Chinese bond market.
“We believe that this represents opportunity as President Xi Jinping only recently announced the country’s plan to reduce, and ultimately, eliminate the country’s carbon footprint,” Lowry said. “As the incentive programs for companies in China roll into the economy, we believe that we will start to see significant outperformance of green bonds over the rest of the market.”
To help investors access China’s green bond market, Global Beta Advisors will be offering the actively managed Global Beta China Green Bond ETF (GRBD).
The active China green bond ETF strategy will track debt securities issued by Chinese corporations that finance environmentally beneficial projects, such as building eco-efficient products or products to prevent and/or control pollution output; investing in wind, solar, or hydrogen-powered energy; or any project targeted to addressing environmentally driven climate change issues. The fund may also hold U.S. dollar-denominated Chinese debt instruments. Global Beta Advisors makes it clear that the ETF will not invest in state-owned enterprises.
In a bid to achieve its green objective, Global Beta Advisors LLC will screen a broad universe of Chinese corporate debt securities and select bonds that finance environmentally beneficial projects. The bond selection is further refined based on FactSet’s TruValue Labs’ environmental, social, and governance, or ESG, scoring methodology.
The managers will also rank issuers on long-term industry-adjusted scores, the recent trajectory of their ESG practices, their credit quality, and their net debt to equity ratio. Bonds with certification from the Climate Bonds Initiative will have greater consideration.
The debt securities will also be evaluated based on credit quality, coupon rate, current yield-to-maturity, convexity, duration, and option-adjusted spreads.
Financial advisors who are interested in learning more about China’s green bonds can watch the webcast here on demand.