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Going Green to Access Yield


PAUL MURDOCK: Green bonds offer market participants a way to add an element of impact investing into their core exposure in a simple way. Today we’ll discuss the characteristics and performance of the S&P Green Bond Select Index, and how green bonds can fit within a portfolio.


Hello, I’m Paul Murdock and joining me today to discuss this strategy is Aye Soe, Managing Director, Global Research and Design at S&P Dow Jones Indices, and William Sokol, Director of ETF Product Management at VanEck. Thank you both for being here today.


AYE SOE: Thank you.


WILLIAM SOKOL: Thanks for having us.


MURDOCK: Aye, to get us started. What are green bonds, and just how global are they?


SOE: Green bonds are fixed income assets that are issued to fund projects with environmental or climate benefits. The majority of the green bonds that are issued are what we call green use of proceeds bonds. They differ from traditional bonds in the sense that the proceeds from the green bond issuance are specifically earmarked to fund environmental activities. It's a win-win for the investor as well as for the issuer. In terms of how global green bonds are, we are finding that the green bond market is increasingly becoming global. In the very beginning, the first issuers of green bonds are multilateral institutions—financial institutions such as the World Bank or the European Investment Bank. However, corporate banks and municipalities are also recognizing that it’s one way to access capital while funding the environmental projects. They're also entering the market, and lately, we're also seeing sovereign issuers entering the green bond market as well. Back in December of 2006, Poland was the first country to issue sovereign debt for green bonds projects.


MURDOCK: Great, so quite a diverse mix.


SOE: Absolutely.


MURDOCK: So how do you go about indexing them? How do you design the index to capture that market, and what's unique about our approach?


SOE: In 2014, S&P Dow Jones Indices launched the S&P Green Bond Index. It’s a broad-based benchmark to measure the performance of the global green bond market. We use the green bond flag provided by Climate Bond Initiative (CBI), to ensure that the bonds are truly green, that the proceeds are being used as indicated. And in February of 2017, we launched the S&P Green Bond Select Index. The latter is a smaller subset of the broader green bond index, and to ensure investability and replicability, it has additional criteria such as size, such as market of issuance, as well as the coupon type, etc. So think of that as a narrower, but more investable slice of the broader green bond market, and you are capturing about 70 percent of the global green bond market by market value.


MURDOCK: So how has the S&P Green Bond Select Index performed since it was launched?


SOE: Since its launch in February of 2017, the S&P Green Bond Select Index has done fairly well compared to other broad-based global aggregate benchmarks. That means that just because you are going green, doesn't mean you have to sacrifice the returns. So since February of 2017 through August 2018, the S&P Green Bond Select Index has outperformed let's say a broad-based global aggregate benchmark by 2.52 percent.


MURDOCK: Great. So Bill, turning more to a portfolio context, where might we see green bonds being used within portfolios?


SOKOL: As Aye mentioned, the investable universe is very diverse in terms of the types of issuers you'll find and it’s very global. It's also nearly all investment grade. Keep in mind that this is an inclusive approach to ESG. Any type of issuer can issue a green bond, so you're not excluding entire sectors of the economy, making the universe more representative of the broader fixed income market. When you think of sector and geographic exposure, credit quality, and importantly yield and duration, you find that the overall green bond market is very much in line with a global aggregate bond index. As a result, green bonds can fit neatly into a core bond allocation, and investors can allocate a portion of their portfolio to green bonds without significantly altering their risk/return profile. That's an extremely powerful value proposition for investors looking to build more sustainable fixed income portfolios that are also potentially more resilient to environmental risks.


MURDOCK: Great, so a range of potential applications. Getting a little more specific, how are you seeing institutional investors and financial advisors implement green bonds within their strategies?


SOKOL: We're seeing increasing interest in index-based strategies, and more and more of these investors are choosing to implement that through ETFs. Green bonds are very well suited for a rules-based investment approach because they're defined by the types of projects they finance rather than what can be a much more subjective assessment at the issuer level, which is what you find with many ESG strategies. So in many ways, it's a more straightforward approach to sustainable investing. There are several potential benefits with ETF including price transparency, liquidity, and in general a lower costs versus active management, and we find that green bond investors appreciate the transparency that the ETF provides. You know exactly what criteria a bond needs to satisfy for index inclusion, and you get the daily disclosure of holdings from the ETF so investors can actually look through to the underlying projects being financed and actually estimate the environmental impact, thanks to the reporting provided by issuers and third parties. So the ETF provides investors with an efficient way to access the diversified global opportunity set in a single trade and also measure the direct impact they're having with their investment.


MURDOCK: That's great. And for institutional investors this would also help them meet their allocations that they need to within fixed income. They just get the additional potential benefit of aligning that with the ESG.


SOKOL: Absolutely.


MURDOCK: Great. Well thank you both for your insight. Really appreciate it.


SOE: Thank you.


SOKOL: Thank you.


MURDOCK: For more information and to access our free research and data on green bonds visit spdji.com. Thanks and have a great day.


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IMPORTANT DISCLOSURES


This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Information provided by third-party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this communication and are subject to change without notice.


Please note that Van Eck Securities Corporation offers investments products that invest in the asset class(es) included in this video


The S&P Green Bond Select Index comprises global bonds issued to finance environmentally friendly projects. To be eligible the issuer must clearly indicate the intended use of proceeds, and the bond must be flagged as “green” by the Climate Bonds Initiative.


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.


Bonds are subject to interest rate risks and will decline in value as interest rates rise. Certain bonds in this strategy may include, among others, credit risk, high yield securities risk, call risk and interest rate risk.


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 strategy’s return. The strategy may be concentrated in a particular sector or region and may be subject to more risk than investments in a diverse group of sectors or regions.


All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.


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.


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