Episode 02: Green Bonds with Van Eck
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Van Eck’s Green Bonds Whitepaper
Episode Transcript
Investing Forward Ep 2 - 6:14:20, 12.38 PM.m4a
Linda Rogers: [00:00:00] My name is Linda Rogers and this is Investing Forward.
Linda Rogers: [00:00:22] Hi, this is Linda Rogers coming to you from Atsugi, Japan. This episode we're going to learn about green bonds. So green bonds are the same as traditional bonds, but their proceeds are used to fund green projects. Green projects can be anything from alternative energy, green building, climate adaptation and pollution prevention. Green bonds are relatively new. The first green bond was issued by the World Bank in 2008 when a group of Swedish pension funds wanted to invest in projects that targeted climate change prevention. So with that bond, they essentially created a completely new way for investors to directly fund climate related projects. While green bonds currently make up about one percent of the total bond market, they've seen explosive growth with household names such as Apple and Pepsi all beginning to issue them. So I thought this would be a great topic to cover in this episode. I asked William Sokol from Van Eck to have a conversation with me as he writes extensively about green bonds and he can share what investors should be looking for when they want to invest in this asset class. And make sure you stay tuned for the second half where I have a conversation with Jan Schalkwijk from JPS Global Investments. They're headquartered in San Carlos, CA and he's a financial advisor that can share with you how he's integrating green bonds into his portfolio. So let's get started.
Bill Sokol: [00:01:48] I'm Bill Sokol. I'm an ETF product manager at Van Eck where I have responsibility for our fixed income ETFs as well as our country equity ETFs from a product perspective, so that means researching and launching new funds as well as supporting our existing products.
Linda Rogers: [00:02:08] Great. OK. So tell us a little bit about Van Eck.
Bill Sokol: [00:02:12] So Van Eck is a privately held asset manager. We're based in New York and we aim to provide actively managed ETF solutions that help to strengthen a long term portfolio. We've been around since 1955 and we were actually one of the first to offer U.S. investors access to international markets, which wasn't really on investor's radars at that time. And that forward looking approach has continued today. So, for example, we know that one of the trends that's shaping the future today is the transition to a low carbon economy.
Bill Sokol: [00:02:50] And that's what's led us to launch the Van Eck Vector's Green Bond ETF or GRNB in 2017 GRBN fits into our overall ETF product philosophy of providing efficient access and transparency and pure exposures to investors. But it also aligns with our philosophy that incorporating material ESG factors into any strategy, whether active or passive, can lead to better investment outcomes.
Bill Sokol of Van Eck
Linda Rogers: [00:03:18] So how did you find yourself working there?
Bill Sokol: [00:03:21] So I've always been interested in developing and structuring investment solutions. I actually started my career on a credit derivative structuring desk and I did that both prior to and in the years following the financial crisis. So that was an extremely interesting time to be in that market. And I really got a first hand look at the innovation that can happen in financial markets as well as the risk of over engineering. And I think I really gained an appreciation of what it means to be able to build and provide intelligently designed investments. So after I decided to move into asset management, I saw the tremendous amount of innovation that was taking place in the ETF market and I wanted to be part of that. And I decided to join Van Eck because of the firm's forward thinking approach and strong emphasis on product design.
Linda Rogers: [00:04:14] Ok. So can you explain what a green bond is? Most people have heard of a bond, but they don't know what a green bond is.
Bill Sokol: [00:04:22] So a green bond is like any other bond, except that the proceeds only finance environmentally friendly projects. These projects can include things like renewable energy - so solar and wind, green buildings, mass transit.
Bill Sokol: [00:04:38] There's actually a pretty broad list of the types of projects that can be eligible to be financed for a green bond. But in almost all cases, a green bond is backed by the issuer's full balance sheet. So it's in other words, the payments aren't backed by those projects. They're backed by by the issuer like any other senior unsecured bond. So they rank equally with other conventional or non green bonds. Unlike most bonds, however, where the issuer generally has quite a bit of latitude around how they want to use those proceeds, green bond issuers disclose the types of projects that they're going to finance and there's also an ongoing reporting element that bondholders benefit from. And that includes details on the projects that were financed, as well as estimates of the environment and environmental impact of those projects. But a green bond issued by a company like Apple has the same fundamental risk profile as a conventional bond from Apple. All else equal. And I think that's really what's so attractive about green bonds, is that investors don't need to sacrifice return or take on additional risk in order to build a sustainable fixed income portfolio. And then plus, you've got that transparency in reporting of a green bond, which is attractive to investors who are seeking to make a measurable impact with their investment.
Linda Rogers: [00:06:03] Ok. So from the company's perspective, so let's just take Pepsi, for example.
Linda Rogers: [00:06:10] They issued a green bond in 2019. And as you said, they did put out what the proceeds were going to be used for. So they're a beverage company, right? So for them, it's eco friendly packaging and plastics, operational water efficiency. So from their standpoint, they need money for this project. They can issue a standard bond or if it qualifies a green bond. What is the benefit to them to issue a green bond?
Bill Sokol: [00:06:35] So it's certainly true that a company like Pepsi can issue a standard bond rather than a green bond and invest in the same types of projects if they chose to do so. Because it is true with a green bond, a company is committing to adopting a disclosure and reporting framework that isn't typical for most bond issuers. And for a first time issuer like Pepsi, there can be a modest cost to establish that type of program along with the time that's spent to develop that. But despite that cost, there has been a lot of interest in issuing green bonds for both first time issuers like Pepsi and also repeat issuers. And I think there's a few reasons for that. First, issuing a green bond provides a market signal. And I think it's a very high profile signal to the market that you're taking sustainability seriously. We see that investors are increasingly looking for issuers who are addressing sustainability risks in their operating models. So that signal, by labeling the bond as a great bond, can offer benefits to issuers and investors. And then, of course, if a company has green projects that it's looking to finance, a green bond can be a great way to match the funding needs of the company to its sustainability initiatives. Now, a second benefit that we hear a lot about is a better issuance experience. And what I mean by that is that we have heard that the book building process to issue a bond is generally smoother and faster. We often see that green bonds are more oversubscribed than conventional bonds, and that's likely due to this huge and growing demand that we're seeing for ESG and sustainable bonds and just investments in general.
Bill Sokol: [00:08:26] And issuers also get to diversify their investor base with a green bond because it is like any other bond can be bought. And we'll go into your traditional fixed income benchmarks and portfolios. And then in addition, you've got the ESG investors coming in to the deal. And that diversification of funding sources is always a good thing for an issuer because you might be able to more easily tap a broader investor base in periods of volatility such as we're seeing right now. So the company is getting funding for green projects, it could be diversifying its investor base and also getting greater representation in green bonds and ESG indexes at the same time. For investors labeling the bond as green as a great way to identify potential investments and then that can obviously fit into a sustainable portfolio. We actually think that further due diligence is needed beyond just labeling a bond as green. When we were designing GRNB, we felt that it was crucial to have a rigorous framework in place to assess the bonds objectively so that investors in the fund could have confidence that the bonds are truly green. To achieve that, what we did was we partnered with an organization called the Climate Bonds Initiative, which is a NGO based in London. They work to grow the global green bond market. And one of the things that they've done is develop a taxonomy of eligible projects that they've developed with climate scientists. And all these projects are aligned with the goals of the Paris Agreement, which is essentially to achieve a rapid and dramatic reduction in greenhouse gas emissions, to limit global warming and to do that without additional harm to the planet.
Bill Sokol: [00:10:16] So what they do is the review every bond that gets issued that comes to market to confirm that the bond that is calling itself green is aligned with their taxonomy. And in order to be eligible for GRNB's index and therefore make it into our fund, the bond needs to be confirmed as green by the Climate Bonds initiative. So the Pepsi bond you mentioned is actually quite interesting because so far to date, that actually hasn't really that hasn't received this designation as a green bond. And the reason for that is there's just not enough information to make the determination that it aligns with the climate bond initiative taxonomy. And the reason for that is is actually directly related to their promise to fund these sustainable packaging initiatives that the company is planning. And apparently a lot of plastic alternatives are not actually always biodegradable or recyclable. So the Climate Bonds Initiative didn't feel they had enough information to designate that bond as green. They do, however, monitor new information that gets put out by green bond issuers like Pepsi. So if new information comes to light that would change that determination, then any change to eligibility would then be made and reflected in the index and in GRNB's index. But again, it's just an additional layer of due diligence that we felt was important to make sure that investors can be sure that their investments are truly green.
Linda Rogers: [00:11:51] And as an aside, I'll just say, you know, when you start looking at investing in green bonds, you're going to see the term labeled versus unlabeled green bond. So labeled green bonds are bonds that are basically calling themselves green and they're expected to follow these voluntary guidelines from the Green Bond Principles. So these are principles that were established by a group of investment banks in 2014. So the GBP emphasizes transparency as it relates to the use of proceeds and things like reporting. But it does not provide details on what is actually green. So that is where the CBI comes in, the Climate Bonds Initiative that Bill just mentioned because they developed a taxonomy with scientists and industry experts that list all of the assets and projects needed to deliver a low carbon economy. So they break that list out by sector such as energy, transport, water, buildings, etc., and they use a red, yellow, green light system. So a green light means that an asset or project is automatically compatible with a low carbon economy and does not have to comply with any additional requirements. Red is automatically not compatible. Yellow items are compatible if certain requirements are met.
Bill Sokol: [00:13:05] There are a lot of projects I would say are pretty unambiguously green. So things like solar and wind. Renewable energy in general. But you do have cases that maybe are less clear cut. So things like large scale hydro electric projects where, you know, you're flooding an ecosystem for power. That's more controversial. Nuclear power is also more controversial. So you want to have a framework in place to make sure that a bond, a labeled green bond, is truly green. Now, as I mentioned, the label is a signal to the marketplace, however. So I would say it is a very useful signal. You can certainly have a bond that doesn't have a green label and the proceeds do go towards environmentally friendly projects. So an example of that would be a pure play company like Tesla issuing a bond. I think you could could reasonably argue that if a business is inherently green, then the bond issued by that company is a green bon, even if they're not disclosing what the use of proceeds will be used for. But I think a lot of investors may be a little more skeptical if they find out, you know, say that bond is being issued to fund a shareholder dividend or maybe the issue or just want to have a little more cash on hand given the uncertainty in the market right now. So we have found that investors do appreciate the green label, the ongoing reporting that a labeled green bond that adheres to these best practices in the green bond market are issued under. I think that recording can actually help investors understand the impact that their investment is having. So you won't you won't really get that with your conventional bond. So, again, I think that transparency is highly valued that you get with labeled green bonds. Again, you do want the additional layer of framework to make sure that a labeled green bond is truly green, but that transparency is helpful. And I think it's been a very powerful driver in the growth of the green bond market.
Linda Rogers: [00:15:12] So let's switch gears to performance. We did just go through a market correction and green bonds are a relatively new asset class with the first green bond again being established in 2008. So how have green bonds performed?
Bill Sokol: [00:15:27] So it is a relatively new market. And you're right, I think it's now big enough and diversified enough that you can make reasonable performance comparisons with the broad market. So if we look at the performance over the last few months and the recent sell off to other investment grade fixed income sectors, particularly in the corporate space, there was a significant outperformance of green bonds in March if you're looking at headline returns. So, for example, looking at a green bond index return versus a U.S. investment grade corporate bond index. But I do think you need to make certain adjustments if you want to have a more apples to apples comparison, because there are some pretty significant compositional differences between the two different universes. So, for example, green bonds are more tilted towards corporates compared to something more like a U.S. AGG benchmark. So you need to take that into account. And then within corporateS from a sector perspective, you do tend to have larger, more highly rated issuers in green bonds typically, and more defensive sectors as well. You see a lot of financials and utilities in green bonds and less weight towards some of the sectors that were more or have been more impacted by covid. On the other hand, you also probably got more EM and maybe even more high yield exposure and green bonds.
Bill Sokol: [00:16:55] So again, you just need to make these adjustments. I think if you really want to compare the performance and also, by the way, if you're comparing to something like the U.S. AGG, the U.S. Treasury has not yet issued a green bond. So there are no green treasuries yet. So you also need to take things like that into account. When you do adjust for these differences -and we have looked at this - we haven't really seen major differences in performance. And I'd actually say that they've performed exactly as we would have expected. And by that, I mean in line with. traditional bonds. You know green bonds haven't really been about outperformance because they should provide the same performance or very similar performance to conventional bonds. All else equal because they have the same risk profile. And again. That's really the nice thing about green bonds is that they can fit very nicely into a core bond allocation because of that. You don't need to take on additional risk. You don't need to sacrifice return. So you're your overall risk and return profile isn't really changed by allocating to green bonds. But at the same time, you enhance the sustainability profile of the portfolio. Now, as mentioned, you're able to build a more diverse and climate aware portfolio with exposure to issuers that might exhibit lower sustainability risks.
Linda Rogers: [00:18:20] What about the cost to investors? So there is a high demand for green bonds. And with the Pepsi bond, for example, they were 3X oversubscribed. And we're seeing that a lot. Right. Companies will come out, issue green bonds, well oversubscribed. So that just means that investors placed orders, you know, in the Pepsi example for $3B and they just were planning to sell $1B max. So because of that high demand for green bonds and lower supply. Right. Green bonds, I think last I looked, we're 1% of the total bond market. Are investors paying a premium to get these green bonds?
Bill Sokol: [00:18:56] So we haven't really seen that. And there's been numerous studies done by various investment banks and the Climate Bonds Initiative. They look at this. And so far, we have not seen any significant difference between green bonds and conventional bonds. And I think that makes a lot of sense because a green bond is generally going to be backed by the full balance sheet of the issuer. So fundamentals are the same. So if you compare the Pepsi green bond to a comparable Pepsi bond, you're probably not going to see any significant difference in terms of yield. Again, you need to consider differences in maturity - liquidity, coupon, et cetera, to make an apples to apples comparison. But fundamentally speaking, there is no difference between a green bond and in a conventional bond. And overall, that is what we see out there. Now, I think there is this idea that you will see lower yields in green bonds versus conventional bonds because of that strong demand out there. But again, we haven't seen that. Now, I think if you look at individual bonds or individual issuers or even sometimes certain segments of the market, you might see that sometimes they might trade at slightly lower yields. You might also find that they trade at slightly higher yields as well. So it's really case by case. But overall, we see green bonds in line with with conventional bonds.
Bill Sokol: [00:20:29] And I actually think that most investors really wouldn't accept a meaningfully lower yield on a green bond versus a non green bond. If the risk is the same. Now, what I do think might happen over time is that green bond issuers who are proactively managing their climate risk exposure may perform differently from issuers who are more exposed to these risks. So I'm looking at it more from the issuer perspective than than the individual bond issues. I think that might happen over time. I think if a company is issuing green bonds, it may be an indication that they are proactively addressing things like climate risk. So I think the market may start to distinguish between those types of issuers vs. issuers that are more exposed to climate risks or other types of environmental risk. And when that happens and when the marketplace begins to price in that risk, just as interest rate risk or credit risk are priced in today, then I think you might start to see outperformance of issuers that have lower levels of climate risk. So I think that's why a lot of fixed income investors are starting to look at green bonds as a low cost or even a no cost hedge against climate risk in their portfolios. Since you don't have to really sacrifice yield in order to get this exposure right now.
Linda Rogers: [00:21:53] Yeah. OK, great. And are there any tax benefits to owning green bonds?
Bill Sokol: [00:21:58] No, there's no explicit incentives to owning green bonds in the US. It is a you know, there's different regulations in different markets. And I think a lot of regulators globally are looking at ways to incentivize green bond investment and green bond issuance. So I wouldn't be surprised to start seeing certain incentives appear in certain places. From the US perspective, there are no efforts certainly at the federal level to really spur green investment through green bonds at the moment. Again, that could change. We'll see. But it's actually pretty amazing when you think about how much the green bond market has grown over the past 10 years plus without this type of incentive or federal support for the market. It's really been an investor driven market so far.
Linda Rogers: [00:22:56] So what's the expense ratio of your green bond fund, GRNB.
Bill Sokol: [00:23:02] So GRNB has an expense ratio of 20 basis points.
Linda Rogers: [00:23:06] Ok. I'm also curious, how are advisors and investors integrating GRNB into the bond allocation of their portfolio?
Bill Sokol: [00:23:16] Yes. So in general, what we so the green bond space is a very it's a multi-sector and tend to be very high quality. It's predominately investment grade. And even within investment grade, you see a lot of concentration in the A and AA space. You see corporates, financials, government related agencies. But again, it's diverse and tends to be high quality. So what we see is that a lot of advisors and other types of investors are putting into their core bond allocation because it has many characteristics that are similar to something like the US AGG, the aggregate bond benchmark, in the sense that it's high quality, not a big difference in yield or duration. So it can fit nicely into a core bond allocation. So that that's how we see most investors looking at GRNB as a way to build a more sustainable fixed income portfolio without impacting risk and the overall risk and reward profile of the portfolio. The other way I think some investors are looking at green bonds and GRNB is what I mentioned earlier about, you know, getting exposure to a set of issuers who are addressing climate risk and their operating models. So trying to get exposure to potentially lower, lower risk issuers. So when, you know, climate risk does get on to more investor's radars and that gets priced in, having exposure to green bonds can be a way to hedge against that.
Linda Rogers: [00:25:06] So there are other companies that offer green bonds. What makes Van Eck different?
Bill Sokol: [00:25:11] So, yeah, we see a growing number of green bond strategies in the market place, which I think is a reflection of the demand that we're seeing for green bonds. And I think more generally for sustainable investing. Many of the green bond strategies that are out there do tend to be actively managed. And with those you just really need to understand how a manager is assessing whether the bond is green by that manager's standards. And, you know, most probably don't limit themselves to the labeled green bond market. So again, the manager will have their own framework in place and you just want to make sure you understand that. There are also broader, ESG screen fixed income portfolios that I think you're seeing more of in the marketplace. And in that case, an assessment is generally made at the issuer level rather than what the bond is financing. We would argue that the assessment is a little more subjective to score the issuers broader business activities versus just what the bond is financing. And also, that assessment tends to be a little bit a little bit more backwards looking just based on the data that's been reported in the past.
Bill Sokol: [00:26:25] And that's in contrast to the more rules based and transparent approach to what you see with assessing whether or not a bond is green or not green. I would also argue that green bonds may be a way to have a more direct impact and a more direct environmental impact, since the bonds are financing specific projects directly. And I also say they're more forward looking since the benefits of these projects will last for years or decades to come. Another difference with GRNB versus other funds in the marketplace is that we only invest in U.S. dollar denominated green bonds. The global green bond market is over 60% euro denominated. And that market has been characterized by extremely low and negative interest rates over the past several years. So by focusing only on US dollar denominated green bonds, GRNB allows investors to invest sustainably without sacrificing yield and without having to assume any currency risk. And you also don't have the costs and the complexity of and the unanticipated tax consequences that currency hedging can sometimes lead to.
Linda Rogers: [00:27:38] Wonderful. Is there anything else that you want to share before I let you go?
Bill Sokol: [00:27:42] I will just share that we have a lot of information on our web site www.vaneck.com. For anyone who wants to learn more about green bonds or GRNB, I put out blogs fairly regularly on the space and we have a white paper on the green bond market as well. And we also recently put out an impact report on GRNB, which quantifies the overall environmental impact that the portfolio is having and also provide some interesting highlights from the issuer's in GRNB'S portfolio. So if anyone wants to learn more, I'd encourage you to visit Van Eck's website.
Linda Rogers: [00:28:19] Thank you again so much for joining me. And I will have Bill's information on the InvestingForwardPodcast.com website. Next stop, Jan Schalkwijk from JPS Global Investments.
Jan Schalkwijk of JPS Global Investments
Jan Schalkwijk: [00:28:31] Yes, I'm Jan Schalkwijk. I'm the founder and investment manager of JPS Global Investments. My firm specializes in socially responsible investing, but I been in this business for a while now. And it's been nice to see over the years, especially the last few years, the interest in socially responsible investing, really picking up. And it's it's bringing new new voices to the industry and to the table. And I think that's a really good thing.
Linda Rogers: [00:29:04] And what did you do before you started? JPS Global Investments.
Jan Schalkwijk: [00:29:08] I worked at Franklin Templeton and my main reason for leaving was that I wanted to A, I wanted to spread my entrepreneurial wings and do something on my own and B, is I wanted to derive more meaning from investing. I feel like we were, or at least in the job, was so far disconnected from the actual underlying clients and I wanted to have a more impactful relationship with clients and also focus on investing with their values, which I think there's a demand for. That at the time wasn't really something that my previous employer was pursuing.
Linda Rogers: [00:29:44] And who's your typical client?
Jan Schalkwijk: [00:29:47] So the typical client is - we work through a range of different people, but I would say a typical client, somebody maybe 10 years out from retirement and they want to align their portfolio more closely with the values that they hold. And they increasingly believe that that's possible and of course, we believe that's possible, too, without sacrificing return, because at the end of the day, all investors are trying to save for their life goals. And so we that's our primary focus, of course. In addition to private clients, we also work with endowments, foundations that are smaller, mission driven organizations. And for them, it just makes a lot of sense to invest in the causes that they are sort of focused on, whether it's related to the environment or social issues or what have you. So that's another sort of sweet spot for us.
Linda Rogers: [00:30:42] So you listened to the interview with Bill about green bonds. Are you integrating green bonds into your portfolio right now?
Jan Schalkwijk: [00:30:50] I. I pause there for a second because I think it depends a little bit on the definition of green bonds. So if you think of green bonds as the opposite of, say, owning equity in a company. Right. You're investing in bonds essentially, or you're loaning money to a company. We do some notes. We invest in certain notes. We haven't invested specifically in green bonds, but we have invested in sort of debt instruments that have a focus on the environment.
Linda Rogers: [00:31:20] Yup - so they're not not certified green bonds but the proceeds are, you think, be used for things that are green causes.
Jan Schalkwijk: [00:31:29] Yeah. I'll give you an example. For example, we recently looked at soil restoration notes. So there's a company called Iroquois Valley Farmland and they issued these notes. And so essentially it's debt capital to Iroquois Valley Farmland, which is an organic farmland company. And so you earn 2.75% gross yield on the note, on the debt. And a half a percent of that goes to the farmers for reimbursement for cover crop seeds, fencing for a rotational grazing, and costs associated with organic transition and other sort of soil restoration work. So that's an example of kind of a slightly different version maybe of a green bond.
Linda Rogers: [00:32:20] Yeah. And then when you are looking to add something, you know, something like the Iroquois soil restoration note into a portfolio, how do you integrate it? Because I guess it's based in the US. Right? So it's U.S. Focused. And so you kind of just substitute it as part of the US bond allocation. How do you look at it?
Jan Schalkwijk: [00:32:40] I would look at it from a risk perspective as a U.S. bond allocation. I think you also have to acknowledge that maybe the alternative label is appropriate. One of the issues you have to deal with with, you know, buying private investments is that there is liquidity risk. Right. So credit risk, I think you can manage well even in private investments. Liquidity risk is something that's more unique to private investors. So you're locking your money up for five years and perhaps there is a secondary market, but it's not as liquid as buying green bonds, say an ETF or a mutual fund. And so so we are for that reason, we're very interested in investing in green bonds in the more traditional structures. It's just that at the moment we find the the yields to be challenging, to say the least.
Linda Rogers: [00:33:34] So are are people asking for these type of bonds and these investments, like when you get a typical client, are they able to voice their wishes with doing more with their investments? Or is it something that you are presenting to them as a possibility?
Jan Schalkwijk: [00:33:52] It's a little bit of both. I don't think it is as granular as clients saying, gosh, we want to invest in green bonds, although that happens because there's definitely some awareness out there, certainly among my clientele, that these exist. But I think more broadly, people are interested in having deeper impact than just buying socially responsible mutual funds. So I think in that context, it comes up more as one of those options. And so people are asking for that. And often they want to do something locally. Right. So the people I found that had the greatest interest in the Iroquois Valley investment, for example, are clients that are from that part of the country. Right. So a lot of their farms are in the upper Midwest and New York state area.
Linda Rogers: [00:34:45] That's interesting. And I'm curious, do any of your clients ever mention greenwashing concerns? And really, again, that's just, you know, where a company is being misleading about how green their products really are, how green their bonds really is. And that is a concern for people that this is important to them, that perhaps the company is trying to project this green image, but they really are not backing it up with what they're doing and they're not doing the reporting and they're not being transparent. Because I know in the advisor community, that is a really big concern, especially as these green products start to explode. What are your thoughts on that?
Jan Schalkwijk: [00:35:26] Yeah, that is a really good point that you bring up. And I actually think it's less of an issue in green bonds than it is in equity. And the reason I say that is that, for example, we Apple, the company Apple would not meet our ESG screens because of the supply chain issues that they have. However, the apple green bond, because the money is specifically designated for green projects and it's structured that way. Right. And you can you can do the due diligence, you can look at the research from Climate Bonds Initiative and feel comfortable that the money is sandboxed for green products. So now I am investing in a company that otherwise might be considered a greenwashing candidate where I'm now making a very targeted green investment. So I think it's in fact less of an issue in green bonds, in the green bond space, than it is in the equity space. Of course, you know, details matter. Right. So you have to look at the individual investment. But it's a good thing that there are these labels out there that are trustworthy and that the money is sandboxed and that there's some accountability.
Linda Rogers: [00:36:35] So Bill mentioned that the U.S. Treasury has yet to issue a green bond. And I know, you know, like Germany, Sweden, France, Netherlands, they've all issued green bonds for green for certain green projects. Do you think the U.S. Treasury will ever issue a green bond? Would that be something you're interested in?
Jan Schalkwijk: [00:36:52] I would be interested in that because you get the credit quality of the U.S. Treasury, which is appealing. So, so and I think your your guest from Van Eck pointed this out. You're getting the credit quality of the issuer of the bond itself specifically. Right. So in the case of the Apple bond or the Pepsi bond, you have the credit quality of the issuer. And so, yeah, the big missing piece is having something in government securities. I think it will happen. It's not going to happen in this administration, obviously, but even if it were to happen, it takes some time to get it off the ground. So it's something I wouldn't be surprised to see in the next 5 years in the United States because it's such a good opportunity, especially if we go down the path of infrastructure investment, which the government potentially has a role to play in terms of debt financing. I think there's really a good place for green bonds from the government.
Linda Rogers: [00:37:56] Great. Good. Well, that is all my questions. Was there anything else that you want to mention or anything that stuck out with the interview with Bill?
Jan Schalkwijk: [00:38:06] Yeah, I think, you know, your gut instinct is that if there's a lot of demand for something and the supply is limited, that the price is not necessarily going to be attractive from a buyer standpoint. And I think if that hasn't penciled out on specific investments, then that is a nice coincidence, perhaps. But I think it is something to be mindful of because yields are so low that there might be somewhat of a greenium, so a greenium is essentially a premium that accrues to the issuer of the green bond. Right. And so recently the Climate Bonds Initiative put out a study. I think it was the end of well, the period covered the last six months of 2019. And they looked at 36 European green bonds and 13 U.S. bonds and they did find that there might be a slight greenium. So so that that comes at the expense of your yield and your return. So you are getting good credit quality, which I think is really important. But costs matter. So if you make an investment in green bonds, just be cautious that you're not sort of giving up what are already very thin yields. And if you are giving it up, make sure that you're OK with the yield that you're getting and that you know the tradeoff there, possibly.
Linda Rogers: [00:39:39] And I can put a link to the report Jan just mentioned at the website, where it says that in the last six months of 2019, a higher percentage of green bonds than normal exhibited a greenium. So not all green bonds, and we don't know what's going to happen in the future, but it is something to look for him to be aware of if you add green bonds to your portfolio. Jan, is there anything else that you want to mention before I let you go?
Jan Schalkwijk: [00:40:05] Absolutely. I, I just wanted to share with listeners that the field of SRI, ESG, impact investing is really exploding. There's a lot of interest. It's it's a new conversation for a lot of people. There are traditional firms that are coming into the mix. And so I would I would tell investors that they should really make sure that the person that they're working with, that she or he has the same passion for it. And to just be mindful that details matter. Because I what I worry about is that a lot of, it shouldn't be a sort of a trendy thing, right? Every every adviser's getting into this. And so if you're an adviser getting into this, you should really make sure that you do that in a thoughtful manner that sort of own the space in a way that you're comfortable with and you think serves your clients. And as an investor or working with an adviser, I would also have the same advice. Make sure the person you're working with is sort of aligned with you, but also can has the nuance and the experience and the resources to kind of deliver for you.
Linda Rogers: [00:41:21] I think that's a great point. In addition to doing your due diligence on a financial adviser, you may also want to ask, you know, are they integrating ESG factors into their investment process and just get a feel for their knowledge base. You know, are they going to conferences to educate themselves? Are they writing on the topic? Are those good starting points for people?
Jan Schalkwijk: [00:41:43] Yeah, and we recently wrote an article for the Financial Planning Association called SRI Investing - the Details Matter. And it's on our blog page on our website, JPSGlobalInvest.com. And it talks about that, the intentionality of impact investing. And I think that that is good advice, if I may say so myself, to clients and advisers alike.
Linda Rogers: [00:42:12] Excellent. Well, again, I'm going to have Jan's information on the InvestingForwardPodcast.com website. Check it out. And thanks again for joining me, Jan. We'll go ahead and wrap up.
Linda Rogers: [00:42:22] Sustainable debt tools. Such as green bonds, are helping companies transition to a more environmentally and socially sustainable future. They've been tracking the same risk and return profile as traditional bonds from the same issuer, all else being equal. If you choose to invest in a green bond fund, make sure that you understand the underlying allocation of the investment so that you know how to incorporate it into your portfolio. As Bill said, the U.S. Treasury has not issued a green bond to date, so that will not be part of the composition. But I agree with Jan, more and more nations are increasingly realizing that climate change is too costly to ignore. And there's only so much money to go around. So my guess is that it's only a matter of time until we start seeing incentives for investors to purchase green bonds, maybe like there are for municipal and treasury bonds. But stay tuned as we cover more topics as it relates to impact investing and doing more with your money. Check out InvestingForwardPodcast.com to learn more about my guests today.
Linda Rogers: [00:43:24] My name is Linda Rogers. You were listening to Investing Forward. If you liked what you heard, leave us a rating, subscribe and stay tuned for next time.
Linda Rogers: [00:44:12] Linda Rogers is the owner of Planning Within Reach, a registered investment advisor, Planning Within Reach produces the podcast and makes it available on its website and through other distribution channels. Linda Rogers and any guests on the podcast are providing their own views and opinions and are not necessarily the views and opinions of Planning Within Reach. Nothing on the podcast should be construed as a solicitation or offer or recommendation to buy or sell any security. Investment advisory services are only provided to investors who become Planning Within Reach clients pursuant to a written Investment Management Agreement. Clients of Planning Within Reach may hold positions in securities discussed in this podcast. Past performance is no guarantee of future results. All investments involve risk and may lose money. The Investing Forward Podcast is for informational purposes only and should not be relied on for any investment decisions. Consult with a financial advisor, accountant, attorney, or conduct your own due diligence.