BofA Merrill Lynch Global Research has launched a new green bond index in response to rising demand for environmentally sustainable investments.
The new BofA Merrill Lynch Green Bond Index aims to track the performance of debt issued by quasi-governments and corporations to fund sustainability projects.
The firm said Monday that it developed the index in response to growing interest in this market segment, following a recent surge in green bond issuance, and expectations for significant future issuance.
The index tracks the performance of securities issued for qualified “green” purposes. “Qualifying bonds must have a clearly designated use of proceeds that is solely applied toward projects or activities that promote climate change mitigation or adaptation or other environmental sustainability purposes,” the firm says. It does not include general debt obligations of corporations that are involved in green industries. Qualifying securities must have an investment grade rating (based on an average of Moody’s, S&P and Fitch).
There are currently 51 securities included in the index, from 29 different issuers. The index has daily historical data back to its chosen inception date of December 31, 2010. Initially, the index would have been dominated by AAA-rated supranational issuers, Merrill says, as the first qualifying green corporate constituent did not arrive until 2013. However, in 2014, “corporate issuers have contributed equally to the growth of the index and now make up a third of the index capitalization, improving the diversity of the index.”
Earlier this year, Ontario’s provincial government launched the first green bond from a Canadian government, a $500 million offering that was issued to finance a transit project.
“The first green bond was issued in 2007, but through 2012, additional issuance was slow,” said Phil Galdi, head of BofA Merrill Lynch Global Bond Index Research. “However, in 2013 more green bonds were issued than in the previous six years combined, and that volume has already more than doubled in 2014. Currently, there are $31 billion in qualifying green bonds included in the index, but that may just be the tip of the iceberg.”
“It is estimated that the world needs up to $53 trillion in energy investments by 2035, including US$39 trillion to shift away from fossil fuels and $14 trillion for energy efficiency. We believe green bonds are a game changer in unlocking private capital to meet that funding requirement,” added Beijia Ma, thematic investing strategist.