Capital Keeps Flowing Into Green Bonds Despite Inflation Challenges

The rising tide of inflation and interest rates has obviously put a damper on the demand for bonds, but one particular debt offering has been steady despite the current market environment: green bonds.

As the global move towards alternative energy sources continues, more green projects will be undertaken. As such, they’ll need the necessary financing.

“How are such vast amounts of capital to be raised? One answer is through green bonds, a variation of the fixed-income debt instrument historically used by governments and corporations to borrow large amounts of capital,” a Green Biz article said.

The article noted that bonds are the prime choice when it comes to raising the necessary funds for these projects. They’ve essentially supplanted the need for traditional financing means via banks.

“Bonds are the default choice to raise money that dwarfs the ability of banks to lend,” the article added further. “Plus, public debt markets spread the risk, as many individual investors engage as lenders, rather than one or more institutions. A green bond is a fixed income instrument specifically earmarked to raise money for climate and environmental projects.”

ESG With a Yield Component

One option for fixed income investors looking for ESG bond exposure who also want the yield that corporate bonds can offer is the Vanguard ESG U.S. Corporate Bond ETF (VCEB). Additionally, the fund doesn’t command a high premium with its low expense ratio of 0.12% and a 30-day SEC yield of 5.51%, as of October 17.

VCEB seeks to track the performance of the Bloomberg MSCI US Corporate SRI Select Index, which excludes bonds with maturities of one year or less and with less than $750 million outstanding, and it is screened for certain ESG criteria by the index provider, which is independent of Vanguard.

With an eye on quality green investments, the fund has a discerning screener. This adds an air of purity for VCEB’s holdings, avoiding any greenwashing with a keen focus on environmental, social, and governance (ESG) initiatives.

VCEB highlights:

  • Provides debt issues screened for certain ESG criteria.
  • Specifically excludes bonds of companies that the index sponsor determines are involved in and/or derive threshold amounts of revenue from certain activities or business segments related to adult entertainment, alcohol, gambling, tobacco, nuclear weapons, controversial weapons, conventional weapons, civilian firearms, nuclear power, genetically modified organisms, or thermal coal, oil, or gas.
  • Excludes bonds of companies that, as determined by the index sponsor, do not meet certain standards defined by the index sponsor’s ESG controversies assessment framework, as well as firms that fail to have at least one woman on their boards.

For more news, information, and strategy, visit the Fixed Income Channel.