How Green Bonds Overcome ESG Data Challenge
September 21, 2020
Read Time 4 MIN
When news broke this summer about issues around working practices in British fast fashion retailer Boohoo Group plc’s factories, it highlighted one of the challenges faced by ESG investors: conflicting ESG ratings from third-party rating agencies. Green bonds may provide investors with a way of avoiding this. For investors seeking to fund projects or activities that have a positive impact on the environment, green bonds can offer advantages.
Company ESG Data: Absent or Unreliable
When it comes to ESG investing, whether in equities or fixed income, the issue of data remains a knotty one. While, for the time being, there are still problems around the absence of relevant data, their reliability (standardization and third-party auditing remain challenges) or both, there are also concerns around how said data should be interpreted. The existence of, sometimes widely, differing ratings for the same company from different rating agencies provides evidence of this.A Matter of Interpretation
As recent research from the MIT Sloan School of Management1 regarding the divergence of ESG ratings showed, to put it simply, the interpretation of the data is what matters—in particular, the different sets of attributes (for example, greenhouse gas emissions and climate risk management) the ratings agencies use to form ratings and the differences in relative importance ascribed to those attributes. In the case of Boohoo, the divergence was apparent, with one agency having recently given it an AA rating, while pointing out “how it scored far above the industry average on supply-chain labour standards.”2
Green Bond Data: Present and Reliable
Issued by supranational organizations, banks, corporations and governments, green bonds are, essentially, like any other bond, except that they only finance environmentally friendly projects, e.g., renewable energy, energy efficiency, mass transit and others. However, and of particular importance in any discussion around ESG investing, is the fact that green bonds are defined as “green” by the projects they finance, not the broader activities of the issuer. The absence (or not) of ESG data relating to these activities does not enter into the equation; rather, the focus is solely on the projects being financed.
Data reliability, too, can become much less of an issue. (Controversies may still persist as to whether certain types of companies can issue green bonds—for example, the fossil fuel refiner Repsol S.A.3 But that is, we believe, a different question.) Projects like solar and wind are generally pretty unambiguously green and environmentally friendly, but it can be less clear when we talk about things like certain hydroelectric projects or clean coal. Rather than relying on “self-labeling”, investors can rely upon a number of independent organizations that review green bonds to establish whether the projects financed are aligned with their green bond project taxonomies—akin to benefiting from a third-party “audit” of “greenness”—and are, consequently, green.
The Green Bond Advantage
For investors seeking to fund projects or activities that have a positive impact on the environment, green bonds can offer a number of advantages. Since bonds’ green “credentials” are determined by the uses to which the projects’ funds are put, not the broader activities of the issuers, the absence (or reliability of) data around these activities is less of a concern. Without the required data on the projects, a bond cannot, de facto, be defined as green. Although the amount of data provided and level of granularity varies among issuers of green bonds, all issuers must disclose the types of projects financed and the vast majority do provide some level of post-issuance reporting.
The use of an independent third party organization may help confirm that projects align with defined taxonomies, such as the objective of the Paris Agreement, which is to limit global warming to well within two degrees Celsius above pre-industrial levels through a rapid and dramatic reduction of greenhouse gas emissions. This may provide investors with greater comfort than ESG ratings, which use data about an issuer’s broader activities and are based on different interpretations of that data, which, themselves, may not be either complete or reliable.
For example, to be included in the S&P Green Bond U.S. Dollar Select Index, bonds must be designated as “green” by the Climate Bonds Initiative, a leading organization globally that is working to mobilize the debt markets for climate solutions. This means that the bonds align with their taxonomy, which has been developed with climate scientists and is reviewed regularly to ensure it incorporates the latest research and technologies. The taxonomy is designed to align with the overall objectives of the Paris Agreement, as described above, and to do so without incurring additional harm to the environment. The focus of the analysis is on the projects financed rather than the broader activities of the issuer, making this assessment more objective and straightforward.
The VanEck Vectors® Green Bond ETF (GRNB) seeks to replicate, as closely as possible, before fees and expenses, the price and yield performance of the S&P Green Bond U.S. Dollar Select Index. The index is comprised of U.S. dollar-denominated green bonds that are issued to finance environmentally friendly projects, and includes bonds issued by supranational, government and corporate issuers globally.
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IMPORTANT DISCLOSURES
1 Berg, Florian, Kölbel, Julian F. and Rigobon, Roberto: Aggregate Confusion: The Divergence of ESG Ratings, MIT Sloan School of Management, May 17, 2020.
2 Financial Times: Why did so many ESG funds back Boohoo?, July 26, 2020.
3 Financial Times: Green bond boom brings growing pains, September 24, 2017.
Please note that Van Eck Securities Corporation (an affiliated broker-dealer of Van Eck Associates Corporation) may offer investments products that invest in the asset class(es) or industries discussed herein.
This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
An investment in the Fund may be subject to risks which include, among others, green bonds, investing in Asian, Chinese and emerging market issuers, foreign securities, foreign currency, credit, interest rate, floating rate, floating rate LIBOR, high yield securities, supranational bond, government-related bond, restricted securities, securitized/asset-backed securities, financial, utilities, market, operational, call, sampling, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount risk and liquidity of fund shares, non-diversified and concentration risks, all of which may adversely affect the Fund.
The S&P Green Bond U.S. Dollar Select Index (the “Index”) is a product of S&P Dow Jones Indices LLC or its affiliates (“SPDJI”). Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”) and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”). VanEck Vectors Green Bond ETF (the “Fund”) is not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, any of their respective affiliates (collectively, “S&P Dow Jones Indices”). Neither S&P Dow Jones Indices make any representation or warranty, express or implied, to the owners of the Fund or any member of the public regarding the advisability of investing in securities generally or in the Fund particularly or the ability of the Index to track general market performance. S&P Dow Jones Indices only relationship to Van Eck Associates Corporation (“VanEck”) with respect to the Index is the licensing of the Index and certain trademarks, service marks and/or trade names of S&P Dow Jones Indices and/or its licensors. The Index is determined, composed and calculated by S&P Dow Jones Indices without regard to VanEck or the Fund. S&P Dow Jones Indices has no obligation to take the needs of VanEck or the owners of the Fund into consideration in determining, composing or calculating the Index. S&P Dow Jones Indices is not responsible for and has not participated in the determination of the prices, and amount of the Fund or the timing of the issuance or sale of the Fund or in the determination or calculation of the equation by which the Fund is to be converted into cash, surrendered or redeemed, as the case may be. S&P Dow Jones Indices have no obligation or liability in connection with the administration, marketing or trading of the Fund. There is no assurance that investment products based on the Index will accurately track index performance or provide positive investment returns. S&P Dow Jones Indices LLC is not an investment advisor. Inclusion of a security within an index is not a recommendation by S&P Dow Jones Indices to buy, sell, or hold such security, nor is it considered to be investment advice.
The S&P 500 Index is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Van Eck Associates Corporation. Copyright © 2018 S&P Dow Jones Indices LLC, a division of S&P Global, Inc., and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices please visit www.spdji.com. S&P® is a registered trademark of S&P Global and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.
ESG investing is qualitative and subjective by nature, and there is no guarantee that the factors utilized by VanEck or any judgment exercised by VanEck will reflect the opinions of any particular investor. Information regarding responsible practices is obtained through voluntary or third-party reporting, which may not be accurate or complete, and VanEck is dependent on such information to evaluate a company’s commitment to, or implementation of, responsible practices. Socially responsible norms differ by region. There is no assurance that the socially responsible investing strategy and techniques employed will be successful.
ESG integration is the practice of incorporating material environmental, social and governance (ESG) information or insights alongside traditional measures into the investment decision process to improve long term financial outcomes of portfolios. Unless otherwise stated within the Fund’s investment objective, inclusion of this statement does not imply that the Fund has an ESG-aligned investment objective, but rather describes how ESG information is integrated into the overall investment process.
Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck/etf.com. Please read the prospectus and summary prospectus carefully before investing.
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IMPORTANT DISCLOSURES
1 Berg, Florian, Kölbel, Julian F. and Rigobon, Roberto: Aggregate Confusion: The Divergence of ESG Ratings, MIT Sloan School of Management, May 17, 2020.
2 Financial Times: Why did so many ESG funds back Boohoo?, July 26, 2020.
3 Financial Times: Green bond boom brings growing pains, September 24, 2017.
Please note that Van Eck Securities Corporation (an affiliated broker-dealer of Van Eck Associates Corporation) may offer investments products that invest in the asset class(es) or industries discussed herein.
This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
An investment in the Fund may be subject to risks which include, among others, green bonds, investing in Asian, Chinese and emerging market issuers, foreign securities, foreign currency, credit, interest rate, floating rate, floating rate LIBOR, high yield securities, supranational bond, government-related bond, restricted securities, securitized/asset-backed securities, financial, utilities, market, operational, call, sampling, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount risk and liquidity of fund shares, non-diversified and concentration risks, all of which may adversely affect the Fund.
The S&P Green Bond U.S. Dollar Select Index (the “Index”) is a product of S&P Dow Jones Indices LLC or its affiliates (“SPDJI”). Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”) and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”). VanEck Vectors Green Bond ETF (the “Fund”) is not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, any of their respective affiliates (collectively, “S&P Dow Jones Indices”). Neither S&P Dow Jones Indices make any representation or warranty, express or implied, to the owners of the Fund or any member of the public regarding the advisability of investing in securities generally or in the Fund particularly or the ability of the Index to track general market performance. S&P Dow Jones Indices only relationship to Van Eck Associates Corporation (“VanEck”) with respect to the Index is the licensing of the Index and certain trademarks, service marks and/or trade names of S&P Dow Jones Indices and/or its licensors. The Index is determined, composed and calculated by S&P Dow Jones Indices without regard to VanEck or the Fund. S&P Dow Jones Indices has no obligation to take the needs of VanEck or the owners of the Fund into consideration in determining, composing or calculating the Index. S&P Dow Jones Indices is not responsible for and has not participated in the determination of the prices, and amount of the Fund or the timing of the issuance or sale of the Fund or in the determination or calculation of the equation by which the Fund is to be converted into cash, surrendered or redeemed, as the case may be. S&P Dow Jones Indices have no obligation or liability in connection with the administration, marketing or trading of the Fund. There is no assurance that investment products based on the Index will accurately track index performance or provide positive investment returns. S&P Dow Jones Indices LLC is not an investment advisor. Inclusion of a security within an index is not a recommendation by S&P Dow Jones Indices to buy, sell, or hold such security, nor is it considered to be investment advice.
The S&P 500 Index is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Van Eck Associates Corporation. Copyright © 2018 S&P Dow Jones Indices LLC, a division of S&P Global, Inc., and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices please visit www.spdji.com. S&P® is a registered trademark of S&P Global and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.
ESG investing is qualitative and subjective by nature, and there is no guarantee that the factors utilized by VanEck or any judgment exercised by VanEck will reflect the opinions of any particular investor. Information regarding responsible practices is obtained through voluntary or third-party reporting, which may not be accurate or complete, and VanEck is dependent on such information to evaluate a company’s commitment to, or implementation of, responsible practices. Socially responsible norms differ by region. There is no assurance that the socially responsible investing strategy and techniques employed will be successful.
ESG integration is the practice of incorporating material environmental, social and governance (ESG) information or insights alongside traditional measures into the investment decision process to improve long term financial outcomes of portfolios. Unless otherwise stated within the Fund’s investment objective, inclusion of this statement does not imply that the Fund has an ESG-aligned investment objective, but rather describes how ESG information is integrated into the overall investment process.
Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck/etf.com. Please read the prospectus and summary prospectus carefully before investing.