GILLIAN KEMMERER: This year VanEck debuted the first green bond ETF in the United States, VanEck Vectors Green Bond ETF, whose ticker is (NYSEARCA:GRNB). Bill Sokol, ETF Product Manager at VanEck, and Justine Leigh-Bell, Director of Market Development at the Climate Bonds Initiative, are here to tell us more. Bill, please introduce us to the ETF.
WILLIAM SOKOL: GRNB provides targeted exposure to the global green bonds market, which has grown tremendously over the past few years and essentially doubled in size in 2016. GRNB seeks to track the S&P Green Bond Select Index, which is comprised of bonds issued around the world to finance projects that have a positive impact on the environment.
Importantly, the Index only includes “labeled” green bonds that have been flagged as green by the Climate Bonds Initiative. That flag allows for a rules-based approach to select eligible bonds within the Index, and the additional disclosure that you get from labeled green bonds provides clarity into a bond’s proceeds ― specifically, the types of projects that the bond is going to finance. That additional disclosure is a cornerstone of the labeled green bonds market and the Climate Bonds Initiative flag helps to provide that additional visibility to investors.
KEMMERER: Justine, please give us an overview of the Climate Bonds Initiative.
JUSTINE LEIGH-BELL: Climate Bonds Initiative (NYSE:CBI) is a nonprofit global organization based in London. Our core focus is to mobilize debt capital markets for climate change solutions ― investments that are geared toward climate mitigation or adaptation and resilience, which is also becoming incredibly important. Our goal is to reach US$1 trillion in investments that are facilitating a rapid transition to a low-carbon economy, globally, by 2020.
CBI is completely focused on building investor credibility for green bonds via market development, and international standards and certification. We have analytical components that track the market, and engage with issuers and investors on the latest trends and where the market is going. The organization has a number of different work streams that help leverage and drive market growth.
KEMMERER: For investors not yet familiar with green bonds, please tell us what they are and why they are getting so much attention lately.
LEIGH-BELL: Green bonds are like any other bond. There's nothing innovative about them except that the use of proceeds is to finance 100%-eligible projects and assets that will deliver on a green agenda. Much of what we have seen thus far has been geared toward climate change, and additional environmental and even social benefits. We’re also beginning to see that feature. There is very clear disclosure and transparency around both the use of proceeds and making sure that those proceeds are financing 100% green projects and assets.
KEMMERER: How do green bonds fit into a larger portfolio?
SOKOL: We should start by looking at the type of exposure that green bonds offer. Green bonds have evolved over the past few years into quite a diverse opportunity set in terms of issuer type, currency, and geography.
If we look at the S&P Green Bond Select Index as a proxy for the market, we see about a third of outstanding issues coming from government and government-related issuers that include supranationals like the World Bank or the European Investment Bank, government agencies and, more recently, sovereign issuers. Another third comes from financials. Commercial banks, for example, might issue a green bond to fund loans that help to finance environmentally friendly projects.
The remaining third are corporate issues. Utilities are a natural player in this space, and there are green bonds from industrials, consumer-oriented companies and tech companies as well. In 2016, for instance, Apple came out with the largest U.S. corporate green bond issued to date.
You have multi-sector global bond exposure that's also high in credit quality: About 95% is investment grade, mostly AA or better. From a yield, duration, and credit-quality perspective, the overall green bonds market resembles a global aggregate bond type of exposure.
From a portfolio construction perspective, you can pretty seamlessly allocate to green bonds within your global bond portfolio without significantly impacting affecting your risk/return profile. For U.S.-centric portfolios, green bonds provide the added diversification that you get from global bond investing.
Another important point about green bonds’ role within a portfolio is that they give you broad exposure to a group of issuers that are taking a deliberate, strategic approach to addressing and mitigating climate change risks in their investing and operational plans. In a traditional bond portfolio, those risks may not be fully priced in, so green bonds can be a way to potentially hedge against those risks.
There are many ways that you can use green bonds in a fixed income allocation. In all cases the result is, of course, a greener bond portfolio.
KEMMERER: Given the global nature of this initiative, what are some of the developments around the world that are going to influence the growth of the market moving forward?
LEIGH-BELL: To Bill's point, investor demand has been driving this market. It has been fundamentally about risk. One of the things that has been coming out in my meetings here in New York with investors is that they want to see more corporate green bond issuance. That is the biggest opportunity that we see happening here in the U.S. When they start to see companies issuing green bonds, investors find this attractive because it says the company is taking a long-term strategy to identify climate risk and that issuing green bonds is one way to address it. That's becoming incredibly appetizing for investors.
On the global stage, we've had the Paris (Climate) Agreements, where countries like China, India, and even the U.S. stepped up and committed themselves, which sent a very strong policy signal to investors about how seriously countries were taking climate change. There's been a domino effect on the back of that.
We have also had global investor statements at every international forum in the past two years. Big investors are stating that they want to invest up to US$2 billion in green bonds and set up funds accordingly.
One of the most exceptional developments that we have seen has been with China. China has become the largest issuer of green bonds globally, with close to US$40 billion issued so far. It spent 2015 taking a very top-down approach, developing a market and putting the right architecture in place to begin issuance. Literally between 2015 and the end of 2016, issuance went from zero to almost US$40 billion.
India is stepping up as well, with Prime Minister Modi setting an aggressive target of 175 gigawatts of renewable energy by 2030. That was a very strong market signal that helped lead many Indian commercial banks to issue green bonds tied to renewable energy projects. An issuer that stands out is National Thermo Power Corporation (NTPC), India’s largest provider of coal-fired electricity, which issued its first green bond on the international stage at about US$500 million. It was incredibly successful. The collateral was their coal assets funding renewable energy projects. The company saw that if it did not change its business model, it would go out of business.
Latin America's another exciting region. We’ve seen some incredible products coming out of Mexico and Brazil. BNDES, the national development bank of Brazil, recently issued its first green bond, which was long awaited and very successful. Brazil also developed its own sustainable energy fund, which aims to buy local green bonds tied to wind and solar ― so Brazil kick-starts everything not only as an issuer, but also by creating a local market.
Another key development is that 2017 is being called the “year of sovereigns,” or sovereign green bonds. We’ve already seen a successful issue from Poland, which was the first to hit the market in December 2016, followed by an issue from France that hit about €7 billion and covered a series of different projects crossing over water, energy, and other similar categories. We're now waiting for Nigeria's first green bond, which will be the first to come out of Africa and one that will definitely make headlines.
With the green bonds market, there are so many different things happening across the globe, and it's a market that is not just European or U.S. driven. This is clearly a global market, which Moody’s expects will reach about US$200 billion in outstanding principal. We're very excited to see the new players coming, the existing players continuing to issue, and of course the developments that are happening globally to drive this market forward and creating new opportunities.
- - - - - - - - - -
The views and opinions expressed are those of the speaker and are current as of the video’s posting date. Video commentaries are general in nature and should not be construed as investment advice. Opinions are subject to change with market conditions. All performance information is historical and is not a guarantee of future results. For more information about VanEck Funds, VanEck Vectors ETFs or fund performance, visit vaneck.com. Any discussion of specific securities mentioned in the video commentaries is neither an offer to sell nor a solicitation to buy these securities. Fund holdings will vary. All indices mentioned are measures of common market sectors and performance. It is not possible to invest directly in an index. Information on holdings, performance and indices can be found at vaneck.com.
Please note that Van Eck Securities Corporation offers investment products that invest in the asset class(es) included in this video. An investment in the Fund may be subject to risks which include, among others, credit rating downgrades, issuers that may be unable and/or unwilling to make timely interest payments and/or repay the principal on its debt, high yield securities risk, call risk, and interest rate risk, all of which may adversely affect the Fund. International investing involves additional risks which include greater market volatility, the availability of less reliable financial information, higher transactional and custody costs, taxation by foreign governments, decreased market liquidity and political instability. Changes in currency exchange rates may negatively impact the Fund's return. The Fund's assets may be concentrated in a particular sector and may be subject to more risk than investments in a diverse group of sectors.
Fund shares are not individually redeemable and will be issued and redeemed at their Net Asset Value (NYSE:NAV) only through certain authorized broker-dealers in large, specified blocks of shares called "creation units" and otherwise can be bought and sold only through exchange trading. Shares may trade at a premium or discount to their NAV in the secondary market. You will incur brokerage expenses when trading Fund shares in the secondary market.
Index returns are not Fund returns and do not reflect any management fees or brokerage expenses. Investors cannot invest directly in the Index. Returns for actual Fund investors may differ from what is shown because of differences in timing, the amount invested and fees and expenses. Index returns assume that dividends have been reinvested.
The S&P Green Bond Select Index (the “Index”) is a product of S&P Dow Jones Indices LLC or its affiliates (“SPDJI”). Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”) and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”). VanEck Vectors Green Bond ETF (the “Fund”) is not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, any of their respective affiliates (collectively, “S&P Dow Jones Indices”). Neither S&P Dow Jones Indices make any representation or warranty, express or implied, to the owners of the Fund or any member of the public regarding the advisability of investing in securities generally or in the Fund particularly or the ability of the Index to track general market performance. S&P Dow Jones Indices only relationship to Van Eck Associates Corporation (“VanEck”) with respect to the Index is the licensing of the Index and certain trademarks, service marks and/or trade names of S&P Dow Jones Indices and/or its licensors. The Index is determined, composed and calculated by S&P Dow Jones Indices without regard to VanEck or the Fund. S&P Dow Jones Indices has no obligation to take the needs of VanEck or the owners of the Fund into consideration in determining, composing or calculating the Index. S&P Dow Jones Indices is not responsible for and has not participated in the determination of the prices, and amount of the Fund or the timing of the issuance or sale of the Fund or in the determination or calculation of the equation by which the Fund is to be converted into cash, surrendered or redeemed, as the case may be. S&P Dow Jones Indices have no obligation or liability in connection with the administration, marketing or trading of the Fund. There is no assurance that investment products based on the Index will accurately track index performance or provide positive investment returns. S&P Dow Jones Indices LLC is not an investment advisor. Inclusion of a security within an index is not a recommendation by S&P Dow Jones Indices to buy, sell, or hold such security, nor is it considered to be investment advice.
S&P DOW JONES INDICES DOES NOT GUARANTEE THE ADEQUACY, ACCURACY, TIMELINESS AND/OR THE COMPLETENESS OF THE INDEX OR ANY DATA RELATED THERETO OR ANY COMMUNICATION, INCLUDING BUT NOT LIMITED TO, ORAL OR WRITTEN COMMUNICATION (INCLUDING ELECTRONIC COMMUNICATIONS) WITH RESPECT THERETO. S&P DOW JONES INDICES SHALL NOT BE SUBJECT TO ANY DAMAGES OR LIABILITY FOR ANY ERRORS, OMISSIONS, OR DELAYS THEREIN. S&P DOW JONES INDICES MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES, OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE OR AS TO RESULTS TO BE OBTAINED BY VANECK, OWNERS OF THE FUND, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE INDEX OR WITH RESPECT TO ANY DATA RELATED THERETO. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT WHATSOEVER SHALL S&P DOW JONES INDICES BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL, PUNITIVE, OR CONSEQUENTIAL DAMAGES INCLUDING BUT NOT LIMITED TO, LOSS OF PROFITS, TRADING LOSSES, LOST TIME OR GOODWILL, EVEN IF THEY HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, WHETHER IN CONTRACT, TORT, STRICT LIABILITY, OR OTHERWISE. THERE ARE NO THIRD PARTY BENEFICIARIES OF ANY AGREEMENTS OR ARRANGEMENTS BETWEEN S&P DOW JONES INDICES AND VANECK, OTHER THAN THE LICENSORS OF S&P DOW JONES INDICES.
Investing involves substantial risk and high volatility, including possible loss of principal. An investor should carefully consider the investment objective, risks, charges and expenses of the Fund before investing. Bonds and bond funds will decrease in value as interest rates rise. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Van Eck Securities Corporation. © Van Eck Securities Corporation.