The VanEck Vectors Green Bond ETF (NYSEArca: GRNB) turns five years old in March. Its 2017 debut likely put it ahead of its time as the first exchange traded fund dedicated to green bonds, but GRNB is having a moment, and it’s one that could be durable for some time.
GRNB, which tracks the S&P Green Bond U.S. Dollar Select Index, is poised to benefit as green bond issuance increases and as more fixed income investors look to add this form of debt to portfolios. Still, this corner of the bond market is in its formative stages, indicating that there’s a need for more education.
At its core, a green bond is debt issued by a corporation or government to fund environmentally friendly projects. To fit the bill as a green bond, these bonds must carry higher levels of transparency than ordinary issues, and that can be to investors’ benefit.
“The additional transparency and reporting that comes with a green bond issue is uncommon in the bond market. Issuers issue green bonds under a framework that specifies what types of projects can be financed under an issuer’s program, as well as how projects will be evaluated by management, how green bond proceeds will be segregated and tracked, and the frequency of post-issuance reporting and type of information that will be included,” says William Sokol, VanEck senior ETF product manager.
Green bonds can be used to fund an array of projects such as solar panels on corporate offices, retrofitting warehouses to make them leaner and greener, and electric vehicle-related projects. With that variety of applications, end users are left pondering how they can readily identify legitimate green debt.
“The key requirement is that these projects are disclosed so that market participants have the information needed to determine whether a green bond is in fact green,” adds Sokol. “An issuer who provides this transparency and follows other best practices—such as ring-fencing of proceeds and post-issuance reporting—but does not obtain any other certification, can be considered to have issued a ‘self-labelled’ green bond. However, many investors want additional assurance that the projects financed are indeed beneficial to the environment and aligned with a pathway towards a zero carbon economy.”
An advantage of GRNB is that its underlying index only holds bonds defined as “green” by the Climate Bonds Initiative. That ensures the fund’s 303 holdings are subject to standards and requirements, indicating that investors get green bond purity with the VanEck fund.
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