By William Sokol, Senior ETF Product Manager, VanEck
Despite lack of federal support from current and previous administrations, the U.S. has a large green bond market comprising corporate, agency and muni issuers with over $200bn of issuance, accounting for 21% of the global market and ranking it #1 in terms of country of issuer.1 However, the U.S. green bond market is far from where it should be based on the size of its bond market, and even further from where it needs to be to finance a transition to a low carbon economy. There is hope that President-elect Biden’s administration could help spur U.S. green finance and investment, including green bonds. We highlight here a few ways this could happen:
- Climate plan: Much focus has been given to Biden’s $1.7tn plan, which leverages additional private and local investment of $5tn. The plan is centered around a goal of setting the U.S. on the path to be a net-zero emitter by 2050, with 100% reliance on clean energy. The plan includes a 50% reduction in building emissions, investments in electric vehicle charging infrastructure, rail electrification and “green” hydrogen access for industry—all of which would require significant investment. A divided government makes passage in its full form unlikely. However, more limited measures, fiscal spending on infrastructure initiatives and/or executive orders that advance this agenda are possible.
- International engagement: Biden has pledged to re-enter the Paris Agreement on day one of his presidency, which would open the door for increased global cooperation on climate plans and green finance. The U.S. would join the European Union, China, Japan and South Korea in committing to aggressive emission reduction targets, and could take more of a leadership role in crafting global agreements going forward. Cooperation on global green finance standards—for example, by leveraging the planned E.U. green bond standards—could provide regulatory certainty to investors and issuers, and help to grow the U.S. green bond market.
- Potential regulatory and agency actions: There are various regulatory actions that the incoming administration has signaled support for that could encourage green investment or remove existing hurdles, including some which could be achieved without legislation. For example, Biden has pledged to require publicly traded companies to disclose their climate risks and emissions levels, a move experts say could help companies, investors and regulators make better-informed decisions. Many investor groups are hoping for a reversal of Trump-era Department of Labor rules that many believe limit the ability of pension funds to incorporate ESG factors in investment decisions. And what about a green bond issued by the U.S. Treasury? Many countries have already done this, including France, Germany and Chile. The United Kingdom and Canada are expected to come to market in 2021. A U.S. green bond issuance would be a high profile demonstration of renewed U.S. commitment to global climate goals, federal support for the green bond market and provide the global debt markets with a new green benchmark. It would also be an opportunity to finance green infrastructure proposals.
Many obstacles exist to realizing all of these outcomes in full, but it’s worth noting that investors continue to push for better reporting and disclosures on climate risk. Demand for ESG strategies has also continued to grow significantly under the current administration. Among U.S. bond ETFs alone, there has been $1.8bn of YTD inflows into sustainable strategies through October 31—more than three times the past five years combined.2
The Federal Reserve recently acknowledged climate as a risk to financial stability and signaled its intention to join a global consortium of central bankers working to enhance the role of the financial system to manage climate risks and mobilize capital for green investment. They join the Commodities Futures Trading Commission, which recently put out a bipartisan report examining the risk of climate change to the U.S. financial system and ways the financial system can provide solutions.
In short, despite a divided government, recognition of climate risk is growing among policymakers and investors, and green financing solutions may continue to experience rapid growth as a result. A more proactive administration, with favorable polices and fiscal measures on green infrastructure, could result in a significant scaling up of the U.S. green bond market.
The VanEck Vectors® Green Bond ETF (GRNB) seeks to replicate, as closely as possible, before fees and expenses, the price and yield performance of the S&P Green Bond U.S. Dollar Select Index. The index is comprised of U.S. dollar-denominated green bonds that are issued to finance environmentally friendly projects, and includes bonds issued by supranational, government and corporate issuers globally.
Originally published by VanEck, 12/10/20
1 Source: Climate Bonds Initiative
2 Source: Morningstar as of 10/31/2020
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