Popular in Europe, the do-good debt grows in U.S.
By Gerrard Cowan
"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.
About $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 Apple Inc. and Toyota Motor Corp. 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
investments," says Neena Mishra, director of ETF research at Zacks
Investment Research.
The 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 Edward Lopez, 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 says.
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.
The 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.
In demand
"Both 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
sustainable-investing firms.
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 Vishal Khanduja, 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 assets.
Bigger in Europe
The 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 Lyxor 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.
There 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.
BlackRock Inc. launched a Europe-listed Green Bond Index fund in
March, while State Street Corp.'s 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 Chris
McKnett, head of State Street Global Advisor's global
environmental, social and governance, or ESG, investments
business.
He 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.
Mr. McKnett says State Street would consider launching a U.S.
fund, "given the increasing level of awareness and burgeoning state
of the market."
Brown 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 Thomas Graff, 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.
Broader choices
One 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 Jon
Hale, 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.
Still, the 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 Sean Kidney, chief executive of the
Climate Bonds Initiative.
"Once you own a green bond, you also start engaging with the
whole issue, " he says. "You start thinking 'There are solutions, I
can do something.' "
Mr. Cowan is a writer in Northern Ireland. He can be reached at
reports@wsj.com.
(END) Dow Jones Newswires
April 10, 2017 02:48 ET (06:48 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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