Earlier this year, VanEck introduced the VanEck Vectors Green Bond ETF (NYSEArca: GRNB), the first fixed income exchange traded fund offering exposure to green bonds.
Green bonds are debt securities issued to finance projects that promote climate change mitigation or adaptation or other environmental sustainability purposes. The new breed of green bonds gained momentum in global market ever since the European Investment Bank issued the first green bond in 2007, with $81 billion in green bonds issued in 2016 and an expected $150 billion to be issued in 2017, according to a note.
“Green bond issuance this year has surpassed 2016 totals and appears to show no signs of slowing. Year-to-date issuance in 2017 totaled $90.1 billion, as of October 18, versus $81.6 billion in 2016, according to the Climate Bonds Initiative (“CBI”). In fact, September was the busiest month this year with nearly $15 billion issued,” said VanEck in a recent note.
GRNB, which debuted in March, holds 74 green bonds and has $10.6 million in assets under management. The ETF tracks the S&P Green Bond Select Index, which is “is comprised of labeled green bonds that are issued to finance environmentally friendly projects, and includes bonds issued by supranational, government, and corporate issuers globally in multiple currencies,” according to the issuer.
With green bonds, traditional fixed-income investors do not need to sacrifice much as this new breed of debt securities are very closely and highly correlated to conventional bonds, providing income and relative safety, compared to other riskier assets. GRNB has a 30-day SEC yield of 1.12%.
“Notable also is the $12.5 billion of green bonds that were certified under the Climate Bond Standard,” said VanEck. “This means that a third party was engaged to verify the green credentials of the projects financed, and that post-issuance reporting standards are adhered. In 2016, $7.3 billion of green bonds were certified under this standard, demonstrating growing investor demand for this level of assurance. In addition, 87% of the bonds issued this year received a second-party opinion, meaning that the issuer engaged an independent organization to review the bond and the issuer’s green bond framework against the Green Bond Principles, and in many cases assess the ‘green-ness’ of the projects financed.”
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GRNB has an effective duration of 6.66 years. Duration measures a bond’s sensitivity to changes in interest rates.
Green bonds also often feature low correlations to other fixed income assets, a possible advantage for income investors at a time of diverging monetary policies throughout much of the developed world.
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