Interesting Source of Possible Growth for Green Bonds

With more corporations and governments looking to raise capital for environmentally friendly projects, green bonds are becoming go-to financing options.

Increasing issuance and more attention paid to green bonds could be positives for the VanEck Vectors Green Bond ETF (GRNB). GRNB turned five years old earlier this month and is a premier name among exchange trade funds focusing on green bonds.

Part of the allure with GRNB is that it taps into an important theme related to green bonds: Growth in this form of debt issuance isn’t confined to the U.S. More than 35 countries are represented in the fund, plenty of which are emerging markets, and that’s relevant because more developing economies are turning to green debt to finance sustainability initiatives.

“One key dynamic of the emerging-market ESG world is growth outside of China. Issuance excluding China made up almost half of the total in 2019-21, compared to only about a third during the preceding three years. Other increasingly important players in the sustainability market are Chile, where ESG issuance has reached nearly 12 percent of gross domestic product over the last five years, as well as Peru and Mexico,” notes the International Monetary Fund.

China is GRNB’s second-largest country allocation at 11.75% behind the 37.85% the fund devotes to domestic debt. However, the green bond fund also devotes about 7% of its weight to Latin America, a region that’s rapidly climbing the ladder in terms of green financing.

“Sustainable finance incorporates ESG principles into business decisions and investment strategies, covering issues from climate change to labor practices. It has become more mainstream in emerging markets in part because of pandemic-related financing needs, such as healthcare, as well as Latin America’s surge in climate-related borrowing,” notes the IMF.

At a time when U.S. interest rates are rising and other developed market central banks are expected to follow suit, GRNB’s intermediate-term status with a duration of 5.52 years and its exposure to emerging markets, many of which have already boosted rates, are potentially favorable traits for investors.

GRNB holds 325 bonds and sports a 30-day SEC yield well above what investors on many conservative domestic bond funds may enjoy. Even with that, GRNB investors aren’t subjected to excessive credit risk, as nearly half of the bonds residing in the fund are rated AAA, AA, or A, according to issuer data. That’s important because it indicates that some developing economies can go green without high interest costs.

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