GRNB ETF: Question & Answer

• What are green bonds?
• What are the bonds in the VanEck Green Bond ETF (GRNB) used for?
• How are green bonds different from conventional bonds?
• Who can issue green bonds?
• What is the size of the green bond market?
• What are the benefits of investing in green bonds?
• How are green bonds evaluated?
• Are green bonds regulated?
• How do green bonds compare to other labeled bonds like sustainable bonds, social bonds, sustainability-linked bonds, and transition bonds?
• How are bonds in VanEck Green Bond ETF (GRNB) assessed for inclusion?
• What is the criteria for bonds to be designated as “green” by Climate Bonds Initiative (CBI)?
• How to Buy VanEck ETFs?

What are green bonds?

Green bonds are financial instruments earmarked to fund projects that have positive environmental or climate-related impacts. These projects could include renewable energy initiatives, energy efficiency improvements, sustainable land use projects, clean transportation, and more. Green bonds are issued by governments, supra-nationals, municipalities, corporations, and financial institutions.

What are the bonds in the VanEck Green Bond ETF (GRNB) used for?

The majority of the projects financed by bonds in GRNB’s portfolio fall into three broad categories: Renewable Energy (35%), Green Buildings (24%) and Clean Transportation (20%).

GRNB funds projects including renewable energy and green buildings.

Source: VanEck and Issuer reported data as of 9/30/2023.

Unsurprisingly, renewable energy has remained a primary recipient of capital over the past few years. Given the investment needs within the energy sector alone to transition to a net zero economy, this is unlikely to slow down in the foreseeable future. Several U.S. utilities, including MidAmerican Energy, Duke Energy and Xcel Energy, have issued green bonds to finance solar and wind projects across the country. In addition, transmission and distribution infrastructure, smart electric meters and battery storage technology have also been financed by bonds in GRNB.

Green building development and retrofits are also a crucial piece of achieving global climate goals, considering that 42% of annual global CO₂ emissions are generated by buildings.¹ Several U.S. REITs including Alexandria Real Estate Equities, SL Green Realty, Boston Properties, and Vornado have all issued green bonds financing certified green commercial, retail and residential properties, including the iconic One Vanderbilt Building in midtown Manhattan.

Similarly, transport will continue to be an area of focus in the fight against climate change, as it currently accounts for approximately 25% of global emissions and is growing at a rate that is faster than any other sector.² With automobiles as the largest contributor to emissions within the transport category, green bonds such as those issued by Toyota Auto Receivables, Kia Motors and Hyundai Capital Services to finance purchases of electric vehicles may become increasingly common in the industry. Mass transport projects including those constructed and operated by the Metropolitan Transit Authority in New York City and the MTR in Hong Kong, both of which issued green bonds held by GRNB, will continue to play a major role in reducing emissions in urban areas, contributing to more livable and sustainable cities globally.

Other project categories remain a much smaller recipient of green investment, but we believe these may see greater investment in coming years. Although most focus and investment tend to go to projects that may stop or slow global warming, adapting to the existing impacts of climate change also requires significant investment. An increasing focus on the catastrophic impact of the loss of biodiversity may also lead to greater investment in land and aquatic conservation efforts, which will require funding. Climate change adaptation and terrestrial/aquatic biodiversity conservation efforts both received less than 1% of green bond proceeds among bonds in GRNB’s portfolio.

How are green bonds different from conventional bonds?

Green bonds are no different than other bonds except that the funds raised are exclusively allocated to environmentally friendly projects. All else equal, a green bond has the same risk and return drivers as a conventional bond from the same issuer. As a result, investors should expect similar yields and returns. However, unlike conventional bonds, green bond proceeds are allocated only to projects or activities with positive environmental benefits and provide investors with transparency around how proceeds are used, and in most cases, the environmental impact those projects or activities have. This allows investors to have confidence that their investment is funding projects or activities with a positive impact.

The process of issuing green bonds is like that of conventional bonds. The main benefit to issuers is diversification of their investor base. Due to generally strong demand for green bonds, an efficient issuance process is typically oversubscribed. In some instances, the supply and demand imbalance has been reported to drive lower funding costs for issuers. However, in general, yield differences are small, and overall, there does not appear to be any significant structural difference in yields between green bonds and conventional bonds. We believe this reflects the fact that green bonds and conventional bonds have the same risk and return drivers, all else equal.

Who can issue green bonds?

Any entity that wants to finance environmentally sustainable projects can issue a green bond. The global green bond market includes sovereigns, supra-nationals, government agencies, local governments, and corporate and asset-backed issuers. The composition of the market resembles broad multi-sector bond benchmarks. Issuers must clearly disclose the bond’s use of proceeds, and in some cases, satisfy any requirements by regulatory bodies or third parties.

Non-financial and financial corporate entities have the highest green bond issuance globally.

Cumulative Total Global Green Bond Issuance By Entity

Source: Climate Bonds Initiative. Data as of 7/29/2024.

What is the size of the green bond market?

The global issuance of green bonds has been steadily increasing with cumulative global green bond issuance now exceeding about $3.0 trillion.³ Approximately $557 billion of labeled green bonds were issued in 2023 and $428 billion has been issued year to date.³

The green bond market has experienced significant growth in recent years.

Green Bond Issuance (2009 – 2023)

What are the benefits of investing in green bonds?

Investing in green bonds may offer several benefits within a portfolio. Because green bonds are like conventional bonds, they allow investors to incorporate sustainability into their fixed income portfolios without having any significant impact on risk and return. Similar to the broad U.S. bond market, the USD-denominated green bond market is multi-sector, primarily investment grade and similar from a yield and duration standpoint and does not carry foreign currency risk.

Although similar in terms of risk and return, the green bond market is more tilted towards corporates and has a lower weighting to government securities. For example, the U.S. broad market had a 49% weight to U.S. Treasuries as of 6/30/2024, however, the U.S. Treasury has not yet issued a green bond. Accordingly, an allocation to USD-denominated green bonds within a core bond portfolio provides additional diversification. Within corporates, investors may benefit from a higher tilt towards issuers proactively addressing and managing climate risks in their overall business.

Finally, green bonds allow investors to align their investments with their values and sustainability goals by supporting environmentally beneficial projects. Because green bonds are tied to the projects they finance, they also provide transparency into the projects’ environmental impacts.

How are green bonds evaluated?

Green bond issuers often use third-party organizations to evaluate green bond issuance. These organizations assess whether the issuer’s framework aligns with market best practices, proceeds are allocated to eligible green projects and pre/post disclosures are properly reported. This helps to increase transparency and alleviate investor concerns about greenwashing. In some cases, the projects financed by green bonds will also be assessed against certain environmental impact performance standards. Outside of these independent evaluations initiated by the issuer, organizations including the Climate Bonds Initiative independently evaluate green bond issues against certain criteria to determine whether the bond is truly “green.” See below for more details.

Are green bonds regulated?

While there is no global regulatory framework for green bonds, various market-accepted guidelines and standards have been developed to promote transparency, integrity, and credibility in the market. Examples include the Green Bond Principles, which provide guidelines for issuers and investors, and the Climate Bonds Standard, which sets criteria for certifying green bonds.

Regulators in key regions have introduced guidelines and incentives to encourage market standards and growth in the green bond and sustainable finance markets. The European Union has adopted the EU Green Bond Standard and Taxonomy Regulation, the most ambitious regulatory framework of its kind. In the absence of a formal regulatory framework adopted by the U.S. or a formal global market standard, differences are likely to exist in green bond regulations by region. In the U.S., state and local entities can offer tax-exempt municipal green bonds to finance projects with environmental benefits. In China, The People's Bank of China and the China Securities Regulatory Commission have established guidelines for green bond issuance. Japan's Ministry of the Environment and India’s SEBI have issued their own guidelines. The UK supports green bonds through its Green Finance Strategy. These measures promote sustainable projects and the transition to a greener economy.

In addition, the green bond taxonomy developed by the Climate Bonds Initiative (CBI) has provided a valuable tool for international investors to assess green bonds, in the absence of a global standard. The CBI is a non-governmental organization focused on mobilizing the global fixed income markets for climate solutions. One of the ways they promote market growth is by creating standards to give investors and issuers the confidence needed to build a large, liquid and mainstream green bond market. The CBI taxonomy is the backbone of various labeling and certification schemes and provides a guide to climate aligned assets and projects. The CBI taxonomy is grounded in the latest climate science and guided by the overall objective of achieving a drastic and rapid reduction of greenhouse gas emissions to limit global warming to below 2 degrees Celsius. The taxonomy provides investors and other market participants confidence that their green bond investment is aligned with the climate objectives of the Paris Agreement.

How do green bonds compare to other labeled bonds like sustainable bonds, social bonds, sustainability-linked bonds, and transition bonds?

Source: VanEck Research.

Green bonds are solely used for environmental projects, while sustainable, social and other bonds include broader scopes. Sustainability-linked bonds (SLBs) are similar to regular bonds but include incentives for issuers to meet sustainability targets, with penalties like interest rate increases for non-compliance. Transition bonds focus on helping carbon-intensive sectors transition to greener practices. SLBs focus on performance verification.

Some issuers prefer SLBs because the funds can be used for general purposes, unlike green bonds, which are earmarked for specific projects. This flexibility makes SLBs attractive to high-emission industries like cement and steel, which may struggle to find eligible green projects. However, a recent study by the CBI found that more than 80% of 768 sustainability-linked bonds (SLBs) issued from 2018 through November of last year are not aligned with global climate goals. Issuance of SLBs spiked in 2021 post-Covid but has dropped since due to heightened concerns around the credibility of the SLB market.⁴

How are bonds in VanEck Green Bond ETF (GRNB) assessed for inclusion?

GRNB seeks to track the S&P Green Bond U.S. Dollar Select Index. To be eligible for inclusion in the index the bonds should adhere to the following criteria:

What is the criteria for bonds to be designated as “green” by Climate Bonds Initiative (CBI)?

CBI requires detailed reporting on the use of proceeds and only designates bonds to be “green” if 100% of net proceeds fund environmental projects that align with the CBI taxonomy. It excludes sustainability-linked bonds due to lack of transparency on the use of proceeds data and excludes sustainability bonds that fund significant allocations to social-related investments such as schools or hospitals. If there is insufficient data to determine whether the proceeds are aligned with the taxonomy, the bond is not designated as green. Further, the CBI may revise a bond’s status if new information is released post-issuance that would change a prior designation.

How to Invest?

VanEck Green Bond ETF (GRNB) provides exposure to bonds that fund projects and activities that positively impact the environment. It includes only U.S. dollar-denominated bonds designated as “green” by the Climate Bonds Initiative.

Learn more here.

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