“Green” bonds are a small but growing part of the bond market as governments, corporations and other issuers seek to finance projects or activities that mitigate climate change or other have environmentally friendly purposes.
But it’s been difficult for the average person to access that market. Most socially responsible or environmental, social and governance-related investments have included green bonds only as a only portion of their offerings, and there are just a few mutual funds dedicated to these vehicles.
VanEck on Monday enters the green-bond space with the launch of the first U.S.-listed green bond exchange-traded fund. The VanEck Vectors Green Bond ETF (GRNB) is part of VanEck’s family of fixed-income bond ETFs.
The fund, which tracks the S&P Green Bond Select Index, sports an expense ratio of 0.40 percent and has a yield of 1.6 percent. It was seeded with $5 million. According to VanEck, bonds included in the underlying index must clearly disclose the rationale for the issuance, such as the use of proceeds, and the bond must be flagged as “green” by the Climate Bonds Initiative. All bonds must be rated by at least one rating agency, and additional filters are applied regarding minimum par amount outstanding, maturity, and market of issue.
Green bonds are a niche part of the $82 trillion global bond market, but the space has grown rapidly since they debuted in 2007. According to the Climate Bonds Initiative, an investor-focused nonprofit organization that works to promote large-scale investment in the low-carbon economy, $81 billion of green bonds were issued in 2016 and $150 billion are expected to be issued in 2017.
Ed Lopez, head of ETF product management and marketing with VanEck, says the company felt the green bond market has finally grown large enough to support an ETF.
“Liquidity is an important part of any ETF launch, and that market has grown substantially over the last few years to the point where the current market could sustain an ETF…. We anticipate it will grow further,” he says.
Green bonds operate similarly to conventional bonds, he says, other than these instruments have a clearly defined use of proceeds to be directed to green projects. Those proceeds go to help finance programs such as solar and wind energy, energy storage, energy-efficient buildings, smart grids and the like.
According to the Climate Bond Initiative, use of proceeds for green bonds are earmarked for green projects but are backed by the issuer’s entire balance sheet.
“All things being equal, they tend to have the same characteristics and trade the same way as a conventional bond,” Lopez says.