How Are Green Bonds Evaluated?

As the global community intensifies its work to combat climate change, the need to finance these efforts has become increasingly evident. Green bonds, which fund projects with environmental benefits, are at the forefront of this movement. The Climate Bonds Initiative (CBI), an international not-for-profit organization, has established standards to independently evaluate green bonds and identify assets or projects consistent with a 2-degree global warming target set by the COP 21 Paris Agreement. Grounded in climate science and developed through a multi-stakeholder approach, CBI’s taxonomy aims to standardize criteria for green investments and support market growth by reducing greenwashing risk. The CBI has developed a robust methodology to screen and classify green bonds, and the VanEck Green Bond ETF (GRNB) tracks an index that only includes green bonds aligned with the CBI taxonomy.

Foundational Principles

The CBI's Green Bond Dataset Methodology is built on four foundational principles designed to protect the environmental integrity of the bonds:

1. Green Credentials and Environmental Impact: Mandates that projects funded by green bonds result in significant emissions reductions or other positive environmental impacts. This ensures that the financial support is directed towards genuinely green initiatives.
2. Science-Based Verification: Based on scientific research and data-driven insights to substantiate and verify the environmental benefits of funded projects.
3. Flexibility and Practicality: Designed to be both scientifically rigorous and practically usable to accommodate evolving technologies and shifting environmental priorities.
4. Minimum Safeguards: Includes safeguards that screen out activities potentially harmful to the environment to prevent negative environmental impacts.

Key Considerations in the Screening Process

The screening process of the Green Bond Dataset Methodology involves multiple steps to ensure that only bonds with strong green credentials are included and integrates critical considerations for robustness and flexibility:

Climate Bonds Initiative Green Bonds Assessment Process

Source: Climate Bonds Initiative.

• Comprehensive Search: The methodology involves a wide-ranging search across financial platforms, focusing on self-labeled green bonds and considering other relevant labels such as “blue” and “climate action” bonds.
• Sector-Specific Definitions: Bonds are evaluated based on their alignment with sector-specific definitions and eligibility conditions, so that the financed projects deliver significant environmental benefits.
• Flexible Approaches: A margin of flexibility allows for up to 10% of deal size to be allocated where there is uncertainty about alignment, accommodating sectors where metrics may not be readily available.
• Lookback Period: A two-year lookback period is employed for complex assessments to analyze the issuer’s expenditures and evaluate alignment with eligibility criteria.
• Exclusions and Additional Considerations: Bonds with more than 10% of total proceeds allocated to non-green activities are excluded. Sectors such as fossil fuel power, inefficient building standards, and non-aligned expenses are not considered, so that only genuinely green projects are funded.

Ongoing Review and Reclassification

The Climate Bonds Initiative (CBI) uses a variety of sources to analyze a bond’s use of proceeds and to conduct ongoing reviews of the bonds in the Green Bonds Dataset. CBI considers information provided by issuers as well as external assessments by third parties. The CBI also reviews post-issuance green bond reporting, including environmental impact reports, to assess compliance.

If an issuer is unable to meet green bond methodology criteria based on information collected, the bond will be removed from the Green Bond Dataset. Similarly, a bond can be retroactively added to the Green Bond Dataset if an issuer discloses satisfactory information on use-of-proceeds data and associated impact.

The Climate Bonds Initiative's Green Bond Dataset Methodology provides a robust framework for evaluating and classifying green bonds. By adhering to foundational principles and employing a thorough screening process ensuring transparency, the methodology supports the growth of a credible and reliable green bond market. As the world continues its transition towards a low-carbon and climate-resilient future, such methodologies are crucial in helping investors direct capital towards projects that genuinely benefit the environment.

How to Invest in Green Bonds?

VanEck 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 (SPGRUSST). The index is comprised of U.S. dollar-denominated bonds issued to finance environmentally friendly projects. To be eligible the issuer must clearly indicate the intended use of proceeds, and the bond must be designated as “green” by the Climate Bonds Initiative.

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