Through July, global green bond issuance is off the pace set during the same period in 2021, but that’s not necessarily a negative commentary on this emerging corner of the fixed income market.
With interest rates rising in the U.S. and some other marquee markets, debt issuance is lower around the world. Even with that, there are constructive long-term factors at play for the VanEck Vectors Green Bond ETF (NYSEArca: GRNB), which is the original exchange traded fund dedicated to green debt.
Recently, the Climate Bonds Initiative (CBI) updated its scoring methodology pertaining to green bonds. Add that to the passage of the Inflation Reduction Act in the U.S., and there’s momentum for green bonds despite lower issuance in 2022.
“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,” noted William Sokol, VanEck senior product manager. “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.”
CBI’s updates include new criteria for hydrogen-related projects, tighter scoring for buildings, fresh scoring transportation vis-a-vis zero emissions goals, and more. Over time, it’s possible that CBI’s updates could expand the field of bonds with the green bond label. Currently, GRNB holds 326 issues.
Even if the number of green bonds on the market doesn’t expand simply by way of scoring changes, CBI’s updates give asset allocators a better sense for exactly what a green bond is. Demystifying this still-young asset class could foster increased adoption, potentially benefiting GRNB along the way.
“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,” concluded VanEck’s Sokol.
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