A great idea for the sustainability of fixed income
Environmental, social and governance (ESG) concepts and ratings are making their way into the world of fixed income ETFs, but investors have an established option in the VanEck Vectors Green Bond ETF (NYSEArca: GRNB).
GRNB, the original ETF dedicated to green bonds, offers investors broad exposure to a small segment of the fast growing bond market. For investors unfamiliar with this emerging bond segment, green debt can be issued by both companies and governments. It is used exclusively to finance environmentally friendly projects, including improvements to drinking water, green buildings and other renewable energy projects.
As the demand for these concepts increases, so does the issuance of green bonds.
“The first green bond was issued in 2007 by the European Investment Bank. Green bonds made up only a tiny fraction of the bond market over the next decade, with issuance mainly coming from government agencies and development banks. But since 2016, the market has seen a significant increase in issuance each year and from a wider variety of issuers, including sovereigns and corporations, ”notes Morningstar analyst Jose Garcia-Zarate.
Geography matters with the GRNB
The GRNB reflects the global nature of the green bond market, as the VanEck ETF has exposure to over 20 countries and a US weighting of less than 35%. The fund’s solid exposure to Europe is significant as this region is the most important in terms of green bond issuance.
While seven emerging markets, including China, India and Brazil, are represented in the GRNB, developing economies remain minor players in the green bond space. That, however, is likely to change in the future, as these countries seek new ways to fund important renewable energy ambitions.
“According to the Climate Bond Initiative, green bond issuance reached a record high of $ 290 billion in 2020 (a 246% increase from 2016) and is expected to reach $ 500 billion in 2021. This has propelled the Green bond market size to over over $ 1.2 trillion, ”Garcia-Zarate explains.
Last year, investors allocated $ 10 billion to globally listed green bonds, more than double the $ 4.7 billion recorded in 2019. This is confirmation that this area is growing and that GRNB could pay off in the long run for environmentally conscious bond investors.
GRNB is just over four years old and flirts with $ 96 million in assets under management.
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The opinions and forecasts expressed herein are solely those of Tom Lydon and may not come to fruition. The information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy or a recommendation for any product.