BofA Merrill Lynch Global Research Launches Green Bond Index

BofA Merrill Lynch Global Research announced the October 30 launch of the BofA Merrill Lynch Green Bond Index (ticker GREN). The index is designed to track the performance of debt issued by quasi-governments and corporations where the proceeds of the issue are to be used solely for projects and activities that promote climate or other environmental sustainability purposes.

Development of the index has been driven by the growth of interest in this market segment following a recent surge in issuance and expectations for significant issuance to come.

“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.”

Beijia Ma, thematic investing strategist, added: “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.”

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. The first qualifying green corporate constituent did not arrive until 2013. But 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 and also adding incremental spread, as the average rating has declined to AA2 with the addition of the corporates.

Index rules

The BofA Merrill Lynch Green Bond 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. General debt obligations of corporations that are involved in green industries are not included. The index includes debt of corporate and quasi-government issuers, but excludes securitized and collateralized securities. Qualifying securities must have an investment grade rating (based on an average of Moody’s, S&P and Fitch) at least 18 months to final maturity at the time of issuance, at least one month remaining term to final maturity as of the rebalancing date and a fixed coupon schedule. Qualifying securities must be denominated in specified developed market and emerging market currencies. Securities denominated in a qualifying emerging market currency must settle on Euroclear. Currently qualifying currencies and corresponding minimum size requirements are provided below.