How to Address Client Green Bond Inquiries

Advisors know that the universe of environmental, social and governance (ESG) funds is expanding at a rapid pace. They also know that the bulk of the funds in this category are equity-based products and that fixed income has some catching up to do in the ESG realm.

Never fear because exchange traded funds issuers are often in-tune with what asset allocators and advisors are looking for. That is to say the landscape of ESG bonds is growing today and advisors should expect that trend to continue for some time.

Still, there are some seasoned member of the ESG bond ETF fray, including the VanEck Green Bond ETF (NYSEARCA:GRNB). The $102 million GRNB turns five years old in March and is a potentially alluring consideration for clients because the green bond market is booming, the strategy is easy to convey and credit risk is minimal.

Favorable traits to be sure, but GRNB and green bonds are relevant to advisors for another reason. This form of debt brings with it significant value-add/educational opportunities because there's a good chance few, if any, clients know much about green bonds.

Green Bonds Easy to Discuss

A simple explanation of green bonds is this form of debt is issued by both companies and governments to fund environmentally friendly projects. For example, Amazon (NASDAQ:AMZN) could sell green bonds to solar-ize its warehouses or a local government could sell green debt to build electric vehicle charging stations in town.

“A green bond is simply a debt security whose proceeds from issuance are used by the bond issuer to finance environmentally friendly projects,” according to VanEck research. “Green bonds are generally backed by the full faith and credit of the issuer and rank equally with other bonds of the same seniority, rather than being secured by the projects themselves. In other words, a green bond is like any other bond except that the proceeds are tracked separately and investors know what their investment is financing. A green bond is defined by the projects it finances, rather than the broader activities of the issuer.”

The straight-forward nature of green bonds is a benefit for advisors and clients alike because due to the singular focus on the “E” in ESG, a strategy such as GRNB can avoid some of the thorny issues associated with ESG scoring, which are still being worked out in the fixed income universe. In fact, scoring standards for green bonds are remarkably transparent relative to other ESG concepts.

“Fortunately, various taxonomies (a classification system for projects) have been developed, and in an increasing number of markets, regulatory definitions of what constitutes a green project have been established,” adds VanEck. “The projects financed by green bonds can be evaluated against these taxonomies and various regulatory definitions. We believe the green bond taxonomy developed by the Climate Bonds Initiative (CBI) has provided a valuable tool for international investors, in the absence of a global standard.”

That transparency is relevant when considering green bond issuance more than tripled since 2017.

GRNB Ample Long-Term Potential

At a time when advisors are scrambling to find suitable bond investments for clients because Treasuries aren't getting the job done, green bonds can fill voids in fixed income portfolios.

GRNB, which tracks the S&P Green Bond U.S. Dollar Select Index, yields 2.09% and has a duration of 5.90 years, putting it in intermediate-term territory. More than 76% of GRNB's 303 holdings carry investment-grade ratings, including 49% rated AAA, AA or A.

“Investors who allocate to green bonds can also achieve added diversification, as green bonds tend to be more oriented to corporates and less to government issuers (to date, the U.S. Treasury has not issued any green bonds),” notes VanEck. “Nevertheless, these broad similarities allow investors to allocate a portion of a core bond portfolio to green bonds without significantly impacting risk and return, based on traditional portfolio characteristics such as yield and duration.”

Related: Bond Badness: What Worked in Fixed Income May Be on Borrowed Time