As U.S. Mulls ESG Bond Offering, Consider This Option

The United States is mulling over a green bond option to capitalize on the ubiquitous ESG theme. It brings to mind options like the Vanguard ESG U.S. Corporate Bond ETF (VCEB) if fixed income investors want to marry ESG and yield.

“The US Treasury asked an advisory group of securities dealers and investors to assess whether the federal government should start selling green bonds, potentially moving the U.S. closer to joining other nations that have been marketing their debt to funds focused on environmental causes,” Bloomberg reported.

Since the ESG investment theme gained popularity in equities, it eventually spilled over into the bond market. Obtaining funding to advance projects focused on sustainability and clean energy technologies has been the prime focus of ESG bonds. It appeals to bond investors who want to add an ESG component to their fixed income portfolio.

“The option was raised in the Treasury’s quarterly refunding announcements Wednesday (May 1). And was part of a broader focus on expanding the potential types of securities sold by the federal government to seize on shifts in demand,” the report added.

The move towards government ESG bonds was recently introduced by Japan. Adding ESG-focused bonds into the market corroborates with the country’s goal of reducing its emissions. How? By transitioning to alternative energy sources.

“Japan’s environmental, social, and governance bond market took a big leap forward this year when the government issued the world’s first sovereign transition bond, with much success,” confirmed Global Capital.

Marrying ESG and Yield

Per VCEB’s baseline fund description, it seeks to track the performance of the Bloomberg MSCI US Corporate SRI Select Index. That index excludes bonds with maturities of one year or less and with less than $750 million outstanding.

Furthermore, VCEB screens for certain ESG criteria by the index provider, which is independent of Vanguard. The index 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. Those include adult entertainment, alcohol, gambling, tobacco, nuclear weapons, controversial weapons, conventional weapons, civilian firearms, nuclear power, genetically modified organisms, or thermal coal, oil, or gas.

For yield seekers, VCEB has a 30-day SEC yield of 5.45% as of April 29. Its maturities are primarily in the intermediate range (an average effective maturity of about 10 years), striking a balance between rate risk and yield attainment. The fund also includes investment-grade corporate debt to mitigate credit risk while simultaneously achieving ESG exposure.

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