Climate-conscious investors may want to consider more exposure to green bonds. According to a Reuters report, green bond issuers tend to excel at reducing greenhouse gas emissions, per a Bank for International Settlements study.
With the rise of the environmental, social, and governance (ESG) theme in the last five years, the green bond market has reached nearly $3 trillion, according to the study. Green bonds initially experienced early growth in Europe, but have become more prominent globally.
With that growth, the term “greenwashing” was spawned. It refers to companies who may have been huddling under the ESG umbrella solely for marketing purposes. However, the study also noted that “greenwashing” has been reduced, namely due to strict transparency requirements.
The study also acknowledged that green bond issuance is still small, relative to the size of the issuing company. Nonetheless, it’s a positive sign of further emission-reducing initiatives to come.
Per the Reuters report, the study “found that in aggregate terms, the emissions of green bond issuers fell by more than 10% in the four years after issuance and that emissions per unit of company revenue – a measure of emissions intensity – showed an even starker 30% drop.”
A Green Bond ETF Option
Green bonds allow fixed income investors to attain yield while also meeting their ESG objectives simultaneously. Rather than build a bond portfolio from issuers that meet “green” criteria, investors can get it all in one place via the Vanguard ESG U.S. Corporate Bond ETF (VCEB ).
Per its fund description, VCEB seeks to track the performance of the Bloomberg MSCI US Corporate SRI Select Index. That index excludes bonds with maturities of one year or less. It also excludes bonds with less than $750 million outstanding. The average effective maturity is about 10 years, giving investors access to mostly intermediate bond exposure.
When it comes to portfolio construction, VCEB screens for certain ESG criteria by the index provider. The index excludes bonds of companies that the index sponsor determines are involved in and/or derive threshold amounts of revenue from certain activities or business segments. Those include adult entertainment, alcohol, gambling, tobacco, nuclear weapons, controversial weapons, conventional weapons, civilian firearms, nuclear power, genetically modified organisms, or thermal coal, oil, or gas. The index excludes bonds of companies that, as determined by the index provider, do not meet certain standards defined by the index provider with respect to an ESG controversies assessment, as well as companies that do not meet certain diversity criteria.
Additionally, VCEB features a low 0.12% expense ratio and a 5% 30-day SEC yield, as of March 7.
For more news, information, and analysis, visit the Fixed Income Channel.
