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President Trump announced the U.S. withdrawal from the 2015 Paris Agreement on Climate Change, in which nearly 200 countries have pledged to reduce greenhouse gas emissions to limit global warming. There is uncertainty about what this decision will mean for future U.S. policy, given an approximately four-year process to withdraw. While Trump did pledge to re-negotiate the terms, he also announced that current commitments will not be implemented and provided no details on how the U.S. will address climate change, if at all. The Agreement may be weakened as a result, but other large countries (including China and India) and the EU have pledged to remain regardless of what the U.S. does. Beyond increased rhetoric in the near term, it is not clear if Trump’s decision will have a long-term impact on addressing climate change. Theoretically, a “better deal” could result from Trump’s promise to re-negotiate the Agreement, but he would need to convince the rest of the world.
What Does this Mean for Green Bonds?
Regardless of the future of the Paris Agreement, the green bonds market continues to have significant growth potential:
A Global Market
The U.S. has thus far had a relatively small presence in the global green bonds market. Europe, and more recently China and other emerging markets, have played a much greater role in the development of the market in terms of formulating policies that support market growth. Even though the U.S. has ceded its position on the issue of climate change, other countries will likely continue to make progress on renewables, electric vehicles, etc., providing a strong project pipeline for green bonds.
Corporate America and U.S. States are on Board
The green bonds market in the U.S. has developed with little support from the federal government. A wide range of companies had urged the administration to remain in the agreement, and corporate issuers like Apple have issued green bonds both to tout their environmental stewardship and in response to investor demand. Much of the growth in the U.S. has been in the municipal market, which is expected to continue to expand given the massive infrastructure investment needed (note that tax-exempt munis are not included in VanEck Vectors® Green Bond ETF’s (GRNB) Index). Twenty states, most notably California, as well as several U.S. cities are pursuing ambitious emissions reductions programs, many in alignment with the goals of the Paris Agreement.
Economics Favor Continued Progress
Electricity generated from coal has declined by more than 30% from 2005 to 2010, and nearly half of all U.S. power plants that were retired since 2006 were powered by coal.1 Solar and wind power costs are becoming more competitive and solar-related jobs in the U.S. grew 25% last year.2 Chinese coal consumption is also declining as China’s central government continues to adopt policies that favor renewables. Green bonds will play a role in financing the continued transition to renewables.
Massive Investor Demand
There is now $22.9 trillion invested globally in strategies that consider ESG (environmental, social, and governance) factors,3 with $8.7 trillion in the U.S (representing 1/5 of all professionally managed AUM, and up +33% since 2014).4 Signatories to the UN PRI (United Nations Principles for Responsible Investment) represent approximately $62 trillion in AUM,5 and signatories to the Paris Green Bond Statement total $10 trillion.6 Investors are increasingly pushing companies to address climate risks. President Trump’s Paris Agreement decision may even may even help mobilize additional capital into environmentally aware strategies such as green bonds.
The U.S. withdrawal from the Paris Agreement is, at the very least, a psychological blow to those concerned about climate change risks. But the ultimate impact remains unclear. It is instructive to recall that the U.S. has actually been a leader in reducing carbon emissions even prior to the Paris Agreement. The Paris Agreement was a major diplomatic achievement, but it is far from perfect (first because its targets are not enforceable and, second, because many see it as inadequate in its current form). The transition to a low carbon economy is already happening both in the U.S. and globally. This transition requires massive amounts of investment, and green bonds will be part of that.
VanEck Vectors Green Bond ETF (GRNB) is the first U.S.-listed fixed income ETF to provide targeted exposure to the fast-growing green bonds market. GRNB was launched on March 3, 2017, and seeks to track the performance and yield characteristics of the S&P Green Bond Select Index (SPGRNSLT), part of a suite of green indices introduced by S&P.
Video: Tackle Climate Change Risk with Green Bonds
William Sokol, ETF Product Manager, and Justine Leigh-Bell, Director of Market Development at the Climate Bonds Initiative, discuss the growing green bonds market.
IMPORTANT DISCLOSURES
1Source: U.S. Energy Information Administration
2Source: Environmental Finance, “US withdrawal from Paris Agreement ‘an irrelevance’, say investors, 6/1/17
3Source: Global Sustainable Investment Alliance, “2016 Global Sustainable Investment Review”
4Source: US SIF Foundation, “Report on US Sustainable, Responsible and Impact Investing Trends 2016”
5Source: PRI
6Source: S&P Dow Jones Indices
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