Lean on Green: The Growing ESG Bond Market
The hot environmental, social, and governance (ESG) investing phenomenon is already making its way into bonds, which should help fan the flames for assets like the Vanguard ESG U.S. Corporate Bond ETF (VCEB).
VCEB seeks to track the performance of the Bloomberg Barclays MSCI US Corporate SRI Select Index. The index excludes bonds with maturities of 1 year or less and with less than $750 million outstanding, and is screened for certain ESG criteria by the index provider, which is independent of Vanguard.
All of the fund's investments will be selected through the sampling process, and under normal circumstances, at least 80% of the fund's assets will be invested in bonds included in the index.
"The Forum for Sustainable and Responsible Investment, for instance, estimates that there’s $17.1 trillion in sustainable investments in the U.S. which represents 33% of the $51.4 trillion in total U.S. assets under professional management," an article in The Street said. "And some of those assets are invested in green bonds, and those assets are expected to grow dramatically."
- Provides debt issues screened for certain ESG criteria.
- Specifically excludes bonds of companies that the index sponsor determines are involved in, and/or derive threshold amounts of revenue from certain activities or business segments related to: adult entertainment, alcohol, gambling, tobacco, nuclear weapons, controversial weapons, conventional weapons, civilian firearms, nuclear power, genetically modified organisms, or thermal coal, oil, or gas.
- Excludes bonds of companies that, as determined by the index sponsor, do not meet certain standards defined by the index sponsor’s ESG controversies assessment framework, as well as firms that fail to have at least one woman on its board.
A Trillion Dollar Market
As ESG equities continue to gain investor interest and grow their assets accordingly, the same can be said for green bonds. Global investment firm UBS predicts the green bond space could reach $1 trillion.
"According to UBS, the green bond market is expected to hit the $1 trillion mark soon," The Street article said. "In 2020, over USD $400 billion worth of environmental, social and governance (ESG) labeled bonds were issued—including $215 billion worth of green bonds, $133.5 billion of social bonds and $61.4 billion of sustainability bonds."
“I think green bonds can be a sensible addition to portfolios for clients who are concerned about risks especially related to climate change and/or want some positive ESG impact from their investments,” said Bob Dannhauser, senior adviser to The Investment Integration Project, which recently published Fundamentals of Sustainable Investment: A Guide for Financial Advisors.
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