Toronto-headquartered Horizons ETFs has launched a new fixed income ETF in Canada which is the country’s first to target the global green bond market. The proceeds raised by green bonds are directed towards environmental initiatives.
Source: Horizons unveils Canada’s first global green bond ETF
The Horizons S&P Green Bond Index ETF (HGGB CN) has listed on Toronto Stock Exchange and comes with a management fee of 0.45%.
Green bonds are a type of debt instrument issued by governments, government-sponsored institutions, or corporations whereby the proceeds raised are directed to projects with specific environmental objectives.
Since its inception in 2007, the global green bond market has experienced explosive growth with over $1 trillion in cumulative green bond issuances including a record $270 billion in 2020, according to data from the Climate Bonds Initiative, a not-for-profit organization working to promote the use of bond markets to tackle climate change.
Green bonds are becoming increasingly popular as they can provide many of the traditional benefits of fixed income investments such as income generation and portfolio diversification while fitting into portfolios with socially responsible mandates. They are also perceived to be effective at avoiding the long-term material risks associated with firms that have poor ESG credentials.
Steve Hawkins, CEO of Horizons ETFs, said: “More than ever before, governments, supranational institutions and corporations across the world are looking to fund important environmentally friendly initiatives that allow them to both improve their eco-footprint as well as ensure their operations will be in-line with the expanding rigors of environmental regulation.
“Organizations that fail to adapt to the impacts of climate change may face greater business challenges and could ultimately represent a greater risk within a portfolio. Conversely, those that proactively prepare are more likely to be better situated to ‘weather the storm’, protecting their operations and helping to preserve the environment for years to come. These organizations offer arguably more ethical and potentially more sustainable sources of portfolio income for investors.
“HGGB gives Canadian investors the ability to potentially improve the climate risk metrics of their global fixed income exposure, while also feeling good about doing so, knowing they are directing their investment dollars toward a greener future.”
Methodology
The fund tracks the S&P Green Bond US Dollar Select Index which consists of US dollar-denominated bonds with at least 12 months remaining until final maturity and a minimum par amount outstanding of $200 million. According to Horizons, the ETF will seek to consistently hedge currency exposure between the US and Canadian dollars.
Fixed rate, floating rate, fixed-to-floating, zero coupon, and step-up securities are all eligible for index inclusion, while tax-exempt municipal bonds, convertible securities, perpetual securities, private placements, and inflation-linked bonds are not.
Bonds must be labelled ‘green’ by the Climate Bonds Initiative’s formal certification framework which ensures that proceeds are only used for low-carbon and climate enhancing projects and that ongoing transparency and reporting requirements are met.
Constituents are weighted by market value subject to a cap of 10% on any individual issuer and a cap of 20% on the cumulative weight of bonds with non-investment-grade ratings. The index is rebalanced on a monthly basis.
The index has approximately 300 constituents – as of the end of May, it was yielding 2.02% with an effective duration of 5.64 years.