An ETF to capture growing demand for green debt

JThe green bond market could gain momentum as more investors turn to financing linked to climate and environmental projects, as well as related exchange-traded funds.

According to Bank of America Corp. chief Brian Moynihan, demand for green bonds is growing and is expected to grow, Bloomberg reports.

“It’s quite an amazing thing to see how much capital is coming in, and yet we’re just getting started,” Moynihan said at the IIF’s Sustainable Finance Summit. “You’re going to see a lot of action.”

Bank of America is witnessing the shifting trends as the company is an issuer and underwriter for corporate debt issuers looking to clean energy and technology.

“Companies need to issue more green bonds,” which ultimately “supports the strength of their commitment,” Moynihan added.

Additionally, companies can tap into the green debt market to help them achieve their green goals or transition to lower carbon emissions. Specialized borrowing can also pay higher rates to investors, which can attract greater demand for providing this financing, according to Moynihan.

Companies and governments around the world have raised about $94 billion in green bonds so far in 2022, according to Bloomberg data, reflecting record demand and topping the more than $86 billion borrowed for the same period l ‘last year.

A clean transition

Moynihan argued that the focus should be on companies’ commitment to the ongoing clean energy transition and not just the financial aspect.

“There is a mistake in thinking that finance somehow controls this outcome,” Moynihan said. “The finances will reflect this result. It can help educate, advise, build business, build activity, and structure. »

ETF investors who want exposure to the corporate green bond market segment can look to ETF options like the SPDR Bloomberg SASB Corporate Bond ESG Select ETF (RBND), which invests in sustainable debt. The fund tracks the Bloomberg SASB US Corporate Ex-Controversies Select Index and provides a sampling strategy to generally bear the same risk and returns as the index.

The underlying index measures the performance of investment grade corporate bonds issued by companies with certain ESG qualities that also have the risk and return qualities of the parent index, the Bloomberg US Corporate Index. The parent index is comprised of publicly issued, fixed rate, taxable, US dollar denominated corporate bonds. These bonds are issued by US and non-US industrial, utility and financial institutions with a maturity of one year or more and a nominal amount outstanding of $300 million or more.

The index uses a responsibility factor (R-Factor) developed by SSGA to score companies in the parent index for ESG criteria. The R factor takes into account ESG and corporate governance factors when rating companies. It excludes companies that derive significant revenue from any of the following: extreme event controversies, controversial weapons, violations of the UN Global Compact, civilian firearms, thermal coal mining and tobacco. Companies that do not have an R factor in the parent index are also removed.

Securities within the index are weighted to maximize the R-factor of the index while minimizing total risk relative to the parent index.

For more news, insights and strategy, visit the ESG Channel.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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