More companies and governments have made net-zero plans and unveiled wide-ranging commitments to renewable energy. At the same time, the market for financing those endeavors has swelled in size. That includes green bonds, an asset class accessible thanks to a small number of exchange traded funds including the VanEck Green Bond ETF (GRNB ).
GRNB, which follows the S&P Green Bond U.S. Dollar Select Index, turned seven years old in March, making it the largest ETF in the category. GRNB’s mission is simple: provide efficient, passive exposure to corporate and sovereign debt issued to pay for environmentally friendly project.
That can include basic renewable energy projects, clean transportation endeavors and green real estate. In each case, there are burgeoning markets along with growing corporate and government commitments. This indicates there’s a lengthy runway through which the green bond market can expand. Recent issuance data suggests that’s exactly what’s happening.
Examining Green Bond ETF Catalysts
The renewable energy market remains the biggest driver of green bond issuance and related debt accounts. It accounts for 35% of the GRNB portfolio. It’s not just governments that are driving that issuance. There are ample contributions from the private sector, too.
“Several U.S. utilities, including MidAmerican Energy, Duke Energy and Xcel Energy, have issued green bonds to finance solar and wind projects across the country. In addition, transmission and distribution infrastructure, smart electric meters and battery storage technology have also been financed by bonds in GRNB,” according to VanEck research.
Green real estate is another growing frontier for green bond sales. The private sector will drive most of that growth. Put simply, many developers and landlord see cost efficiencies in making their buildings and offices climate friendly.
“Several U.S. REITs including Alexandria Real Estate Equities, SL Green Realty, Boston Properties, and Vornado have all issued green bonds financing certified green commercial, retail and residential properties, including the iconic One Vanderbilt Building in midtown Manhattan,” added VanEck.
In terms of differences between green bonds and their traditional counterparts, the issuance process is similar. Specific to GRNB, the ETF is somewhat unique in that it includes corporate and government issues across a variety of credit grades, though mostly investment-grade. GRNB holdings can and do perform similarly to traditional bonds. However, the primary difference is what the proceeds of GRNB member bonds are used for.
“However, unlike conventional bonds, green bond proceeds are allocated only to projects or activities with positive environmental benefits and provide investors with transparency around how proceeds are used, and in most cases, the environmental impact those projects or activities have. This allows investors to have confidence that their investment is funding projects or activities with a positive impact,” concluded VanEck.
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