Bonds ETFs with a Bonus “Green” Feature

Mother nature is at the mercy of climate change, which is threatening not only animal and vegetable life, but global economies as well. This force majeure is posing risks for agriculture, food, and water supplies.

The goal of the Paris Agreement is to limit the global temperature increase to 2oC. The United Nations’ Intergovernmental Panel on Climate Change estimates that about CAD$3.8 trillion of investment every year to 2050 is needed to achieve this goal. Connecting environmental projects with capital markets is paramount. One way to fill the financing gap is to invest in Green Bond ETFs in such a way that aligns investors’ environmental aspirations with their portfolios.

What is a green bond?

Green bonds are fixed-income securities designed to raise money for climate and environmental projects. A green bond pays interest over pre-specified periods and a principal amount at maturity, similar to a regular bond. It carries the same credit rating as the issuers’ other debt obligations.

Green bonds were first introduced to the market in 2007 by the European Union’s lending arm, the European Investment Bank, followed by the World Bank a year later. Other governments, supranational organizations, and corporations followed suit.

Green bonds are often confused with sustainable bonds. However, they are not the same and cannot be used interchangeably. On one hand, sustainable bonds combine environmental and social welfare while on the other hand, green bonds strictly address environmental and climate issues. Green bonds’ proceeds are most often invested in projects having a positive impact on the environment including sustainable waste management, sustainable land use, renewable energy, energy efficiency, biodiversity conservation, clean transportation, sustainable water management, and climate change adaptation.

Green Bond ETFs come with a favourable tax treatment to enhance their attractiveness to investors. They are often coupled with tax credits and in some instances tax exemptions.

Green bond market

Green debt issuance reached the half-trillion mark for the first time in 2021, ending with USD$522 billion, a 75% increase over 2020, according to the Climate Bonds Initiative. Annual issuance of green bonds is expected to surpass the USD$1 trillion milestone in 2023.

Germany topped the list with the largest share of volume of newly issued green debt during the third quarter of 2021. It issued USD$18 billion (17%) worth of green bonds. The US placed second with USD$15.6 billion (14%) while the UK and China took the 3rd and 4th positions with USD$14.9 billion and USD$12.9 billion, respectively.

The green bond market is relatively nascent but expanding rapidly. Growth is attributable to a combination of political resolve and investor appetite. There is a long way ahead and plenty of room to grow. The green bond market is still a niche in the estimated USD$120 trillion global bond market.

Green Bond ETFs

Green Bond ETFs allow investors to overcome the complexities of picking individual debt securities. They provide investors with an easy and convenient way to fund environmentally friendly initiatives. They bundle different bond issues together in a single basket. The basket trades on a stock exchange, under a ticker symbol, allowing investors to buy the underlying securities in a single transaction.

Trackinsight’s data reveals that the global Green Bond ETFs totalled assets under management of more than USD$1.77 billion. There are 21 Green Bond ETFs currently available in the Trackinsight database. Europe dominates the scene with USD$1.277 billion in assets under management and 16 ETFs. The US is ranked number two with 2 ETFs managing USD$344 million in AUM.

The Trackinsight ETF Screener identifies the Lyxor Green Bond (DR) UCITS ETF (CLIM) as the largest Green Bond ETF in terms of AUM.

Lyxor Green Bond (DR) UCITS ETF (CLIM)

Launched on February 21st, 2017, Lyxor Green Bond (DR) UCITS ETF (CLIM) is the world’s largest Green Bond ETF with USD$405 million in AUM. It is a passively managed fund designed to reflect the performance of the Solactive Green Bond EUR USD IG Index. This benchmark gives investors exposure to EUR and USD denominated investment-grade green bonds issued by sovereign and supranational entities, development banks, and corporations. The fund’s holdings are diversified globally with 20.38% in France, 16.23% in Germany, 9.98% in the United States, and the remainder is distributed across several countries. CLIM costs 0.25% (TER) a year while adopting a capitalization dividend policy where it reinvests generated income.

iShares USD Green Bond ETF (BGRN)

iShares USD Green Bond ETF (BGRN) is the world’s second-largest and the US’s largest Green Bond ETF. It was released to the market on November 11th, 2018. This passively managed ETF’s assets under management reached USD$248 million. It is designed to track the performance of the Bloomberg MSCI USD Green Bond Select Index TR – USD. The index offers investors an objective and robust measure of the global market for fixed income securities issued to fund projects with direct environmental benefits. BGRN is globally diversified spreading its assets across 25 countries. It invests 43.95% of its assets in the United States, 8.05% in China, and 4.28% in Japan. BGRN holds 259 underlying securities where the top 10 components represent 15.09% of total assets. This ETF has a 0.20% TER which is relatively cheap compared with the 0.40% TER charged by CLIM. BGRN follows a distributing dividend policy in a similar fashion to CLIM.

Wealthsimple North American Green Bond Index ETF (WSGB)

Wealthsimple North American Green Bond Index ETF (WSGB) is three months old. It was launched on January 21st, 2022. With USD$149 million of AUM, WSGB is Canada’s largest and the world’s fourth-largest Green Bond ETF. It is a passively managed fund that seeks to replicate the performance of the Solactive Green Bond USD CAD DM hedged Index. The fund invests primarily in investment-grade green, social and sustainable bonds, with its foreign currency exposure hedged back to the Canadian dollar. WSGB costs 0.25% TER per year, which makes it relatively cheaper than CLIM but more expensive than BGRN with 0.40% and 0.20 TERs respectively. Similar to CLIM and BGRN, WSGB follows a distributing dividend policy.

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