“Green bond” issuance is growing fast, part of the overall
trend of do-good investments becoming more popular. And U.S. fund
companies are looking to tap into investor demand for these bonds, which
finance environmentally friendly projects from green infrastructure and
real-estate development to energy-efficiency initiatives.
$81 billion of green bonds were issued last year, according to the
Climate Bonds Initiative, a nonprofit that promotes the debt market as a
way to raise money for projects related to climate change. It expects
$150 billion of green bonds to be issued this year, compared with just
$3 billion were issued in 2012. These figures cover “labeled” green
bonds, meaning they have been reviewed externally and meet certain
definitions, including those of the Climate Bonds Initiative.
A range of private and government organizations have issued green bonds, from
to municipalities, New York’s Metropolitan Transportation
Authority and the governments of France and Poland. They have proved
popular with investors, with most of the issues oversubscribed,
according to the Climate Bonds Initiative. “These are no longer niche
director of ETF research at Zacks Investment Research.
growth of the market has sparked interest from fund companies, with the
first U.S.-listed exchange-traded fund focused on green bonds—the
VanEck Vectors Green Bond
ETF (GRNB)—launched in March.
The ETF was launched to meet growing investor demand for
environmentally focused products, says
head of ETF product management at VanEck, an
investment-management firm based in New York. The green-bond market has
grown large enough in recent years to allow for an ETF to be listed, he
The fund tracks the S&P Green Bond Select Index, which
was launched by S&P Dow Jones Indices last month to track the most
liquid segment of the broader S&P Green Bond Index.
S&P Green Bond Index had an annualized return of negative 0.81% over
the five years through the end of March, compared with negative 0.39%
for its parent index, the S&P Global Aggregate Developed
ex-Collateralized Index, which tracks the performance of a broad range
of investment-grade debt around the world.
The VanEck ETF was launched on the heels of the
Mirova Global Green Bond
fund (MGGYX), a mutual fund that launched in late February.
Mirova, a subsidiary of Natixis Asset Management that focuses on
sustainable investment, had already launched a green-bond fund in
Europe, the Mirova Green Bond-Global fund.
institutional plan sponsors and wealth-management advisers are hearing
demands from their participants and clients for investments with
positive impact,” says
Kenneth St. Amand,
vice president and client portfolio manager at Mirova, explaining
the impetus behind the Mirova funds.
The two new U.S.-listed funds join
Calvert Green Bond
fund (CGAFX), a $74 million mutual fund that was launched in
October 2013 by Calvert Investments, one of the original
The Calvert fund takes a broad
approach, investing both in labeled green bonds and in the bonds of
companies it considers to be leaders on environmental issues. For
example, the fund will buy any bond issued by Apple—even if a bond
doesn’t finance an environmentally friendly project—because of the tech
giant’s efforts to reduce its carbon footprint, says
the fund’s portfolio manager.
However, the fund’s makeup
has changed over the years, Mr. Khanduja says. The percentage
represented by green bonds has increased with the growth in their
issuance, so that they now account for more than half of the fund’s
Bigger in Europe
U.S. is behind Europe in the listing of green-bond funds; there are
several in Europe that aren’t open to U.S. investors. That includes the
Green Bond UCITS
ETF, launched in late February by Lyxor Asset Management, part of the Paris-based
Société Générale Group
which just beat VanEck’s GRNB as the world’s first green-bond ETF.
are numerous Europe-based mutual funds focused on green bonds,
including the Allianz Green Bond fund, the AXA WF Planet Bonds fund and
NN Investment Partners’ NN (L) Euro Green Bond fund.
launched a Europe-listed Green Bond Index fund in March, while
State Street Global Advisors operates the State Street Global Green Bond Index fund in Europe.
Europe has shown greater interest in the green-bond market than the U.S., in terms of both issuance and investor demand, says
head of State Street Global Advisor’s global environmental, social and governance, or ESG, investments business.
points to several reasons, including the relatively early issuance of
green bonds on the continent by organizations like the European
Investment Bank in 2007 and the World Bank in 2008, which helped foster
an investor base.
About 37% of the green bonds outstanding, by face value, are
denominated in euros, according to the Climate Bonds Initiative, the
most for any currency.
Mr. McKnett says that bodes well for the
market’s further development there, because potential issuers will be
confident the market can support new supply.
Still, the number of
U.S. dollar-denominated green bonds has grown quickly over the past
year or so, and they now account for 36% of the global total.
McKnett says State Street would consider launching a U.S. fund, “given
the increasing level of awareness and burgeoning state of the market.”
Advisory, an investment-management company based in Baltimore, is
aiming to launch a mutual fund focused on green bonds before the end of
this year, says
head of fixed income.
Brown Advisory currently includes
green bonds in a number of the accounts it manages for it clients. “I
believe that more and more investors are going to be thinking about
sustainability issues,” Mr. Graff says.
potential drawback of mutual funds and ETFs focused on green bonds is
that they still have a relatively narrow universe to choose from,
despite the recent growth of the market, says
head of sustainability research at fund tracker Morningstar Inc.
There are other funds that take a broader approach and therefore have
a greater range of bonds to choose from, while retaining an ESG theme,
Mr. Hale says. He points to the
TIAA-CREF Social Choice Bond Fund
(TSBRX), a $1.1 billion fund that invests primarily in
intermediate-term investment-grade bonds that meet certain ESG criteria,
in areas from affordable housing to renewable energy.
green-bond market looks set to continue growing, and the new mutual
funds and ETFs are crucial in opening access to individual investors, as
well as raising the profile of climate change as an issue, says
chief executive of the Climate Bonds Initiative.
own a green bond, you also start engaging with the whole issue,” he
says. “You start thinking ‘There are solutions, I can do something.’ ”