An increasing number of investors seek to put their capital into assets that align with their views and ethical values. As a result, terms like "environmental, social and governance" and "socially responsible investing" have entered the mainstream. So, today we introduce two exchange-traded funds (ETFs) that focus on green bonds.
The World Bank defines a green bond as “a debt security that is issued to raise capital specifically to support climate related or environmental projects.”
In 2020, around $288 billion of green bonds were issued worldwide. The size of the market has grown 57% since 2018. Germany, France and the Netherlands account for a third of the green bonds issued globally.
For many investors, one of the main concerns is ensuring that the proceeds of green bonds are invested in environmentally sustainable ways. In other words, how can the industry act against a mere “green-washing” of assets, such as bonds?
Various industry groups have either developed standards, or provide green label certifications. For instance, the International Capital Market Association (ICMA) serves as Secretariat to the Green Bond Principles (GBP), which “are voluntary process guidelines that recommend transparency and disclosure and promote integrity in the development of the green bond market.”
The European Union is also currently working on finalizing its green bond standards. Ensuring climate-neutrality by 2050 is the European Commission’s target. Green bonds are also becoming increasingly popular with European pension funds.
Finally, S&P Global expects the U.S. green bond market to grow significantly under President Joseph Biden’s administration. Other global leaders are also working to implement strategies for lowering carbon emissions and protecting the environment. With all of this put together, we can expect strong investor demand worldwide as well as better industry standards in the green bond market in the coming years.
With that information, here are two ETFs that could help readers diversify their portfolio with green investments.
1. iShares Global Green Bond ETF
Current Price: $54.42
52-Week Range: $53.84 - $56.34
12-Month Trailing Yield: 0.76%
Expense Ratio: 0.20% per year
The iShares Global Green Bond ETF (NASDAQ:BGRN) provides access to global investment-grade green bonds that have been issued to fund environmental projects. Furthermore, in order to reduce currency risks and to make returns more stable, the fund is U.S.-dollar hedged. Since its inception in November 2018, net assets have grown to $212 million.
BGRN, which tracks the returns of the Bloomberg Barclays MSCI Global Green Bond Select (USD Hedged) Index, currently has 569 holdings. The top 10 issuers make up about 32% of the fund. Bonds issued by governments of France, Germany, the Netherlands, Belgium and Italy as well as the European Investment Bank and KfW Group lead the names in the roster.
About 20% of the bonds come from France, followed by Germany (13.54%), the U.S. (9.71%), supranationals (9.61%), the Netherlands (7.58%) and others. A large number of the bonds have A to AAA ratings. Therefore, there is low credit risk.
The effective duration is slightly over eight years. In other words, it could be conferred a medium-term bond fund. If interest rates were to rise significantly faster than expected, BGRN could come under pressure.
As we have discussed in previous articles on bond ETFs, duration is an important concept for bond investors. For instance, a bond fund with a 10-year duration will decrease in value by 10% if interest rates rise 1%. Thus, as a bond's duration increases, its interest rate risk also rises.
Over there past 12 months, BGRN is up about 1.1%. It could be an appropriate fund to park cash that an investor might need in the near future.
2. VanEck Vectors Green Bond ETF
Current Price: $27.30
52-Week Range: $26.99 - $28.09
Another green bond ETF that could be of interest to readers is the VanEck Vectors Green Bond (NYSE:GRNB), which provides exposure to U.S.-dollar-denominated green bonds for financing environmentally-friendly projects.
In addition to bonds issued in the U.S. and various European countries, GRNB also holds bonds from China, South Korea, Brazil, India, Chile, Indonesia and others.
GRNB started trading in March 2017, and net assets stand at $88.5 million. Over the past 12 months, it has been up about 0.3%. Investors seeking exposure to the fast-growing space of clean energy and green bond funds might want to do further due diligence on GRNB.