Using Green Bonds To Build An SDG Portfolio

by: VanEck

For investors seeking to achieve both sustainability and financial objectives, green bonds have emerged as an important bridge to the UN Sustainable Development Goals (SDGs). The SDGs represent a globally agreed upon framework that can help investors understand and measure how their portfolios are contributing to addressing critical global sustainability issues.

An overarching principle of the SDGs is to provide a viable model for economic growth that does not come at the expense of certain societies or the environment. The SDGs comprise 17 broad, complex, and interconnected environmental and social goals, with detailed targets representing a global consensus on sustainable development priorities through 2030.

Sustainable Development Goals

Source: UN

A Framework to Guide Investment Decisions

The SDGs have gained widespread support across a broad constituency, including corporations, international development organizations, and governments. Asset managers and asset owners are increasingly looking to align investment processes with these goals, as interest in and demand for responsible investing continues to grow. The SDGs can provide a framework to mobilize the trillions of dollars needed to achieve these goals, and also to identify opportunities for social, environmental, and financial returns. The cost of achieving the SDGs is enormous, but so are the potential economic benefits. In addition, the costs of failure have the potential for, in our opinion, large economic consequences.

Investors can use the SDGs in several ways, depending on their objectives. From a purely financial perspective, the SDGs can help investors understand the sustainability issues that can create material risks within a portfolio. Similarly, they can help identify investments that can benefit from offering solutions to sustainability challenges. At a more macro level, the SDGs can help identify systemic risks as well as emerging long-term megatrends that may drive financial returns in the future. For investors looking to measure both societal and financial returns, the SDGs offer a framework to measure impact. Providing a common language among investors and companies, the SDGs also serve as a platform for engagement on sustainability issues.

Green Bonds: A Bridge to the SDGs

Green bonds offer a link to the SDGs for investors seeking both sustainability and financial objectives. Their innovation is in their simplicity, given that they are structurally no different from traditional bonds. The additional disclosure and transparency of green bonds on the use of proceeds help connect investors with assets that are expected to deliver a positive sustainability impact.

Below, we highlight how green bonds align with specific SDG targets, and the potential economic impact that achieving these goals may have. All bonds mentioned are included in the S&P Green Bond Select Index, indicating that they have been designated as "green" by the Climate Bonds Initiative (CBI). This means that the projects financed align with CBI's taxonomy, which is based on achieving a dramatic and rapid reduction in greenhouse gas emissions to mitigate climate change. The SDGs cannot be achieved in isolation, and achieving one can have multiple knock-on impacts. Identifying where green bonds may provide a direct pathway towards the achievement of specific SDG targets provides a starting point towards mobilizing the capital needed to finance these goals, unlocking economic potential and growth.

Green Bonds for Climate Action SDG

Climate change is considered by many to be the fundamental challenge of the 21st century. The consequences of failing to achieve SDG 13 are potentially catastrophic, and jeopardizes all other goals. Sustainable agriculture, access to clean water, and zero poverty are difficult to envision in a world that fails to adequately address this challenge. Specific targets related to SDG 13 include integration of climate into national policies and adapting to climate-related hazards.

The vast majority of green bonds finance projects such as renewable energy, green buildings, and sustainable infrastructure, and a small percentage go towards adaptation projects. France's green bond program provides an example of a green bond aligned with SDG 13. In addition to projects related to climate change adaptation, the bonds finance mitigation-related expenditures such as tax credits and interest free loans for green buildings, tax credits for sustainable agriculture, and funding for sustainable transport and clean energy technology research and development.

Green Bonds for No Poverty SDG

With 10% of the global population in extreme poverty1, building more resilient infrastructure, sustainable land use, and ecological protection can help increase the resilience of vulnerable communities to extreme climate-related events, which is a target of SDG 1. Green bonds can therefore play a role in achieving this goal, which would significantly contribute towards other SDGs and unlock the economic potential of these populations.

One of African Development Bank's strategic goals is to achieve sustainable growth that leads to a deep reduction in poverty, and the bank uses green bonds as a way to fund its work. The bank notes that compared to other regions, Africa has the highest proportion of its population at "extreme" risk to climate change. Projects funded in 2016 include a solar project in Mali, irrigation infrastructure in Morocco, and traffic reduction and poverty alleviation projects in Tanzania.

Green Bonds for Zero Hunger SDG

Over the past 10 years, the agriculture sector has absorbed 25% of the total damage and losses caused by droughts, floods, and other extreme climate events2, emphasizing the need for sustainable agriculture solutions. Green bonds can support efforts to achieve agricultural productivity and sustainable food production targets. With private sector commercial potential in food and agriculture estimated to be worth $2.3 trillion annually and to generate 80 million jobs3, the investment opportunity is substantial.

The International Bank for Reconstruction and Development, part of the World Bank Group, uses green bonds to fund a variety of initiatives in emerging markets, including projects related to agriculture and land use. Project examples include pasture-based livestock management in Armenia, a reduction in water usage for rice, wheat, and maize farms in China, and an agricultural innovation program in Peru.

Green Bonds for Good Health and Well-being SDG

This SDG includes a target to substantially reduce the number of deaths and illnesses from hazardous chemicals as well as pollution and contamination in the air, water, and soil. Good health and well-being contribute to the social and economic development of communities, and 24% of income growth can be attributed directly to health improvements.4

Beijing Capital's $500 million green bond provides an example of a bond aligned with this goal, as a portion of its proceeds will be used to control air pollution in China.

Green Bonds for Clean Water and Sanitation SDG

This goal includes five separate targets related to improved water quality, pollution reduction, water usage efficiency, water management, and protection of water-related ecosystems. Water is vital for producing food and energy, and therefore for the livelihoods of people and economic growth.

Several water-related green bonds have been issued. For example, NWB Bank's green bonds finance projects related to flood defense, water treatment, and transport and cleaning of wastewater. Eligible projects for Anglian Water's green bond are related to water management and water recycling.

Green Bonds for Affordable and Clean Energy SDG

Renewable energy represents 40% of green bond total issuance, making it the largest category in terms of use of proceeds5. Specific targets of SDG 7 relate to increasing the share of renewables in the energy mix, increasing efficiency and expanding infrastructure to provide access to clean energy. 14% of the global population lacks access to electricity, demonstrating the need and opportunity to not just build more capacity, but build green capacity.

Examples include Southern Power, whose green bonds have financed several large-scale solar and wind projects in multiple states, and EDF, whose green bonds have financed hydro and wind projects in France, the U.S., and Canada.

Green Bonds for Decent Work and Economic Growth SDG

The SDGs emphasize not only economic growth but also quality of growth. That includes the creation of quality jobs. SDG 8 includes a target on decoupling economic growth from environmental degradation, including job creation in fields such as clean energy and building new green infrastructure.

KfW, a German development bank that is one of the world's largest financiers of renewable energy, estimates that 22 jobs are created or secured for every EUR 1 million invested (approximately $1.2 million) in their green bonds.

Green Bonds for Sustainable Industry, Innovation, and Infrastructure SDG

Adequate infrastructure has numerous positive effects on economic growth and in achieving other SDGs. Targets for SDG 9 relate to developing resilient infrastructure that supports development, upgrading, and retrofitting existing infrastructure to improve sustainability, as well as enhancing research and encouraging innovation.

Transport for London and MTR have issued green bonds to help finance new low-carbon transit projects in Greater London and Hong Kong, respectively.

Green Bonds for Sustainable Cities and Communities SDG

This goal includes targets related to air quality, waste reduction, green space development, effective planning for climate change, and sustainable building development. With 54% of the world's population in urban areas, the human opportunity associated with SDG 11 is massive. Further, cities are the world's engines of growth, representing 80% of global GDP, while also consuming 75% of natural resources, generating 64% of global energy demand, and producing 50% of all waste, illustrating the need to make these environments more sustainable.6

At a country level, the French sovereign green bond included funding for the "City of Tomorrow," with nearly 500 active projects in development. At a more local level, Massachusetts Institute of Technology's green bond financed five LEED7 certified buildings.

Green Bonds for Life below water SDG

Green bonds can contribute towards targets related to marine pollution reduction, protecting marine ecosystems, and sustainable fisheries. Healthy oceans balance the effects of climate change, and have an economic impact as well.

DC Water's green bonds focus on projects to improve the water quality of rivers and waterways, enhance flood relief and mitigation protection, and remove harmful contaminants and pollutants from waterways, which flow into the Atlantic Ocean.

Green Bonds for Life on land SDG

Targets for SDG 15 relate to conservation, restoration, and sustainable use of ecosystems, an end to deforestation, and protection and promotion of biodiversity. Similar to oceans, forests play a critical role in absorbing greenhouse gas emissions, and 15% of all greenhouse gas emissions are the result of deforestation.8

Sovereign green bonds issued by France and Poland have financed conservation and restoration projects in those countries. The Commonwealth of Massachusetts' green bond has funded open space protection and environmental remediation projects in the state, as well as restoration and management of natural habitats and wetlands.

Investment Opportunity and Impact

The overall cost to achieve the SDGs is difficult to fathom, estimated at nearly $6 trillion per year.9 Financing needs remain massive even when isolating specific goals. For example, SDG 13 (Climate Action) is estimated to require $300 billion per year of additional investment to meet sustainability goals, in addition to the nearly $3 trillion base case that reflects current energy policies.10 Governments alone cannot finance these goals, and private capital is needed. While not all of the SDGs are naturally attractive to private capital seeking an investment return, many are. Long-dated, income-generating projects are well suited for financing through loans or green bonds. The growth of the green bond market reflects this opportunity, allowing investors to potentially achieve both sustainability and investment objectives, without having to compromise on either.

The global framework provided by the SDGs allows investors to not only understand sustainability issues, but to also build more sustainable portfolios and identify the risks and opportunities that will emerge as the world grapples with the most challenging issues facing humanity. Green bonds will play a key part in addressing these challenges.

To learn more about green bonds, request our whitepaper: "Income with Impact: A Guide to Green Bonds". Investors can gain exposure to green bonds through VanEck Vectors Green Bond ETF (NYSEARCA:GRNB).

IMPORTANT DISCLOSURE

1 Roser & Ortiz-Ospina (2018): Global Extreme Poverty

2 FAO, IFAD and WFP. 2015: Achieving Zero Hunger: the critical role of investments in social protection and agriculture. Rome, FAO.

3 AlphaBeta, 2016. Valuing the SDG prize in food and agriculture

4 Jamison et al (2013). Global Health 2035: A world converging with a generation

5 Climate Bonds Initiative, 2018. Briefing: Green bonds as a bridge to the SDGs.

6 Citigroup, 2018: United Nations Sustainable Development Goals: Pathways to Success, A Systematic Framework for Aligning Investment

7 Leadership in Energy and Environmental Design (LEED) certification provides independent verification of a building's green features

8 WWF, 2018: Overview of deforestation

9 Citigroup, 2018: United Nations Sustainable Development Goals: Pathways to Success, A Systematic Framework for Aligning Investment

10 International Energy Agency, World Energy Outlook 2017

The indices listed are unmanaged indices and do not reflect the payment of transaction costs, advisory fees, or expenses that are associated with an investment in any underlying exchange-traded funds. Certain indices may take into account withholding taxes. Index performance is not illustrative of fund performance. Indices are not securities in which an investment can be made.

An investment in VanEck Vectors® Green Bond ETF (GRNB®) may be subject to risks which include, among others, green bonds, investing in European and emerging market issuers, foreign securities, foreign currency, credit, interest rate, high yield securities, supranational bond, government-related bond, restricted securities, securitized/asset-backed securities, financial services, utilities, market, operational, call, sampling, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares, non-diversified and concentration risks, all of which may adversely affect the Fund.

Fund shares are not individually redeemable and will be issued and redeemed at their Net Asset Value (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. Past performance is no guarantee of future results. Returns for actual Fund investments may differ from what is shown because of differences in timing, the amount invested, and fees and expenses.

Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contains this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.