By William Sokol
Senior Product Manager
The green bond market’s explosive growth over the past decade has coincided with increased rigor and transparency. As the market matures, standards continue to tighten as recognition grows that increased ambition is needed along with greater green investment, in order to meet global climate goals. Through July 31, 2022 green bond issuance totaled approximately $260 billion, down from $328 billion over the same period in 2021. However, global debt issuance is generally down this year as issuers and investors grapple with higher rates and volatility, and we believe this slowdown is temporary.
Global Green Bond Issuance
Source: Climate Bonds Initiative as of 7/31/2022.
The Climate Bonds Initiative (CBI), an international organization working to mobilize global capital for climate action, recently updated its green bond screening methodology, raising ambitions and reflecting the evolving nature of the market. The CBI screens all self-labelled debt to confirm the green credentials of the bond’s use of proceeds and ensure alignment with the CBI’s green bond definitions in terms of the types of assets financed and the project category. These definitions are based on the CBI’s green bond taxonomy, which is designed to identify projects and activities that are consistent with the climate goals of the Paris Agreement—namely to achieve rapid de-carbonization to limit global warming to well below two degrees above pre-industrial levels. The methodology is consistent with the EU Sustainable Finance Taxonomy, and the CBI aims to be at least as stringent.
Not all self-labelled green bonds will receive the CBI green bond designation. If a bond is not aligned with their definitions or there is not enough information to make a determination, a bond is not considered “green” regardless of the bond’s label or the disclosures provided. The S&P Green Bond U.S. Dollar Select Index only includes bonds designated as green by the CBI.
Some highlights from the CBI’s latest updates to their methodology are described below.
- Energy: New screening criteria have been added to hydrogen related projects, given the potential for zero emissions energy generation from this source but with a carbon footprint that can vary greatly depending on production method. The criteria for bioenergy and hydroelectric projects have been expanded, while additional details on the criteria for energy infrastructure have been added.
- Buildings: Building criteria have been tightened, reflecting an increased need to decarbonize the sector by 2050. Only higher rated, well-established international and local certification schemes and energy performance rating schemes are eligible. Retrofits of existing buildings now require at least a 30% improvement in energy efficiency (versus the previous “significant improvement”). New airport buildings are now specifically excluded from being eligible projects, recognizing that the aviation industry has no viable plan to decarbonize in the near to medium term, and is expanding the life of existing assets, which is therefore inconsistent with international climate action.
- Transport: Recent updates reflect a tightening of criteria that is consistent with the EU Taxonomy as it relates to requiring passenger vehicles to be zero-emission by 2025 and the allowance of public transport projects only if they are zero-emission. There is also new detailed criteria on shipping.
- Disclosure: In addition to sector specific changes, some of which are described above, the updated methodology provides additional guidance on disclosure requirements. Given the tighter technical thresholds, the granularity of disclosure is dictated by the nature of the green investment. There must be sufficient information in terms of the projects financed and technical details to confirm alignment. Lack of sufficient information results in exclusion by the CBI.
- Research & Development: The updated methodology provides additional guidance on R&D investments, recognizing that such spending is a key component of combatting climate change. However, such investments are harder to assess, compared to, for example, a solar or wind project. Outcomes are more uncertain and harder to quantify, particularly for early stage R&D. The updated guidance provides that a clear plan or strategy must be provided to understand the aims of the R&D and the climate related goals, in order for a bond that finances R&D spending to receive a green designation. The CBI cites green bonds issued by NXP, a global semiconductor company, as an example of the types of disclosure and green R&D investment that align with CBI definitions. NXP clearly set out a strategy for its R&D in its green bond framework with an overall climate-related goal of improving energy efficiency. Detailed descriptions of the opportunities were outlined with reference to given products and processes. These details were embedded in a broader process which explained how NXP planned to manage, monitor and report on the proceeds raised.
The criteria used by the CBI to screen green bonds continues to evolve over time as science, technologies, regulations, policy, and climate thinking also evolve. This includes providing additional guidance on new technologies, expanding eligible sectors or tightening existing standards as the need to decarbonize becomes more pressing.
The transparency of the CBI’s methodology and criteria provide issuers with confidence to issue green bonds that meet rigorous standards, reducing risk and helping to grow the size of the global green bond market. At the same time, the CBI’s green designation provides investors with confidence that the green bonds they are investing in are truly green and aligned with meeting ambitious global climate objectives.
Originally published by VanEck on August 18, 2022.
For more news, information, and strategy, visit the Beyond Basic Beta Channel.
Please note that VanEck may offer investments products that invest in the asset class(es) or industries included herein.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities/financial instruments mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its employees.
Sustainable Investing Considerations: Sustainable investing strategies aim to consider and in some instances integrate the analysis of environmental, social and governance (ESG) factors into the investment process and portfolio. Strategies across geographies and styles approach ESG analysis and incorporate the findings in a variety of ways. Incorporating ESG factors or Sustainable Investing considerations may inhibit the portfolio manager’s ability to participate in certain investment opportunities that otherwise would be consistent with its investment objective and other principal investment strategies.
ESG investing is qualitative and subjective by nature, and there is no guarantee that the factors utilized by VanEck or any judgment exercised by VanEck will reflect the opinions of any particular investor. Information regarding responsible practices is obtained through voluntary or third-party reporting, which may not be accurate or complete, and VanEck is dependent on such information to evaluate a company’s commitment to, or implementation of, responsible practices. Socially responsible norms differ by region. There is no assurance that the socially responsible investing strategy and techniques employed will be successful.
The S&P Green Bond U.S. Dollar Select Index (the “Index”) is a product of S&P Dow Jones Indices LLC or its affiliates (“SPDJI”). Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”) and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”). VanEck Green Bond ETF (the “Fund”) is not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, any of their respective affiliates (collectively, “S&P Dow Jones Indices”). Neither S&P Dow Jones Indices make any representation or warranty, express or implied, to the owners of the Fund or any member of the public regarding the advisability of investing in securities generally or in the Fund particularly or the ability of the Index to track general market performance. S&P Dow Jones Indices only relationship to Van Eck Associates Corporation (“VanEck”) with respect to the Index is the licensing of the Index and certain trademarks, service marks and/or trade names of S&P Dow Jones Indices and/or its licensors. The Index is determined, composed and calculated by S&P Dow Jones Indices without regard to VanEck or the Fund. S&P Dow Jones Indices has no obligation to take the needs of VanEck or the owners of the Fund into consideration in determining, composing or calculating the Index. S&P Dow Jones Indices is not responsible for and has not participated in the determination of the prices, and amount of the Fund or the timing of the issuance or sale of the Fund or in the determination or calculation of the equation by which the Fund is to be converted into cash, surrendered or redeemed, as the case may be. S&P Dow Jones Indices have no obligation or liability in connection with the administration, marketing or trading of the Fund. There is no assurance that investment products based on the Index will accurately track index performance or provide positive investment returns. S&P Dow Jones Indices LLC is not an investment advisor. Inclusion of a security within an index is not a recommendation by S&P Dow Jones Indices to buy, sell, or hold such security, nor is it considered to be investment advice.
The S&P 500 Index is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Van Eck Associates Corporation. Copyright © 2018 S&P Dow Jones Indices LLC, a division of S&P Global, Inc., and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices please visit https://www.spglobal.com/spdji/en/. S&P® is a registered trademark of S&P Global and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future results.