Incorporating Green Bonds into a Portfolio
It's important to remember that green bonds are like any other bond except they only finance environmentally friendly projects. All else equal from a risk return perspective, a green bond is the same as a conventional non-green bond. So from a portfolio construction perspective, we can set aside for a second the fact that we're talking about green bonds and just look at the fixed income exposure you're getting.
The U.S. dollar-denominated green bond market has many similarities to a U.S. aggregate bond benchmark. Both are high quality and provide diversified and multi-sector exposure. We have government, corporate financial and agency issuers all active in the green bond space. From a yield and durations standpoint, green bonds are in line with the U.S. agg so you can allocate a portion of your core bond exposure into green bonds with very little impact from that perspective, and without adding currency risk and also increasing sector diversification. That's an extremely attractive value proposition for fixed income investors who are looking to build sustainable bond portfolios.
Another way we see investors using green bonds is as a risk mitigator, and I'm talking specifically about climate risk. Climate risk is complex and we find that it's not really priced by the market, as opposed to your traditional bond risks like interest rate risk or credit risk. An example of climate risk could be an oil company whose assets are held mostly in underground fossil fuel reserves or a municipality who has infrastructure assets that are vulnerable to rising sea levels. When the market does begin to price in climate risk, you might expect those issuers to underperform issuers who have addressed climate risk, and with the green bond strategy, you're getting diversified exposure to a set of issuers who are proactively interested in climate risk. Because you're not giving up yield, you can think of it as a cheap or free hedge against climate risk in your bond portfolio.
Why Focus on U.S. Dollar-Denominated Bonds?
The global green bond market is about 70% euro-denominated.1 That market has been characterized by extremely low, and even negative, interest rates in recent years, which makes it difficult for a U.S. dollar-based investor to take that currency risk in their portfolio, even if they find the green aspect attractive. Fortunately, the U.S. dollar segment of the market has grown significantly in recent years, and we can now build diversified and liquid investment strategies without the currency risk. We believe that a U.S. dollar-based green bond strategy can allow more investors to build sustainable fixed income portfolios without the currency risk, without giving up yield, and without the costs, complexity, and sometimes unanticipated tax consequences associated with currency hedging.
How Can Investors Be Confident the Bonds Are Green?
Projects like solar and wind are unambiguously green for the most part, but it gets more complicated when we talk about projects like clean coal or projects that are seemingly green but may have unintended environmental consequences. When we launched the VanEck Vectors®Green Bond ETF or GRNB, we knew it was crucial that we have an objective, consistent, and science-based framework in place to select the bonds so that investors can be confident that they are investing in bonds that are truly green. To do that, we partnered with an organization called the Climate Bonds Initiative or CBI. The CBI is the leading voice globally in the green bond market, helping to mobilize debt markets to fund climate solutions, and their framework has really become a de facto standard in the marketplace. They've developed a taxonomy, which is an extensive list of vetted project types that are all aligned with the Paris agreement. That's the overarching principle of their taxonomy. Specifically, it's to limit global warming to well within two degrees above pre-industrial levels through a rapid and dramatic decline in greenhouse gas emissions.
What the CBI does is it reviews all of the information around a green bond issuance to confirm that the projects being financed align with their taxonomy. If it does, the bond is then eligible for GRNB's index. If there's not enough information to make that determination, or if the projects are not aligned, that bond is not eligible. The CBI also reviews ongoing reporting from the issuer to ensure there's no new information that would affect the bond’s eligibility. The result is that investors can have confidence that the bonds they're investing in are truly green thanks to this independent review.
1Climate Bonds Initiative
2S&P Dow Jones Indices
- - - - - - - - - -
The views and opinions expressed are those of the speaker and are current as of the video’s posting date. Video commentaries are general in nature and should not be construed as investment advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Any discussion of specific securities mentioned in the video is neither an offer to sell nor a solicitation to buy these securities. Fund holdings will vary. All indices mentioned are measures of common market sectors and performance. It is not possible to invest directly in an index. Information on holdings, performance and indices can be found at vaneck.com.
The Climate Bonds Initiative (“CBI”) is an international not for-profit working to mobilize the bond market for climate change solutions.
An investment in the VanEck Vectors Green Bond ETF may be subject to risks which include, among others, green bonds, investing in European and emerging market issuers, foreign securities, foreign currency, credit, interest rate, high yield securities, supranational bond, government-related bond, restricted securities, securitized/asset-backed securities, financial services, utilities, market, operational, call, sampling, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares, non-diversified and concentration risks, all of which may adversely affect the Fund.
Investing involves substantial risk and high volatility, including possible loss of principal. Bonds and bond funds will decrease in value as interest rates rise. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Van Eck Securities Corporation. © Van Eck Securities Corporation.
Van Eck Securities Corporation, Distributor
666 Third Avenue, New York, NY 10017