Green Bond Indexes Explained: A Guide for Investors

Understand How Green Bonds Work in America

Green bonds are no longer just a niche within the fixed income market — they are truly taking up space in sustainable allocation strategies.

As institutional investors, pension funds, and asset managers incorporate ESG criteria into their portfolios, green bond indexes have become key instruments.

This article offers a technical and strategic view of how green bond indexes work, what role they play in the U.S. market, and how investors can use them to capture value and mitigate risks in a sustainability-focused portfolio.

What Are Green Bonds?

They are debt securities issued to finance projects with clear and measurable environmental benefits — such as renewable energy, energy efficiency, clean transportation, sustainable water infrastructure, among others.

They differ from conventional bonds by their specific use of proceeds and a commitment to transparency in how the raised funds are allocated.

In America, issuers include private brands like Apple and Verizon, as well as government entities and institutions like the World Bank.

The Role of Green Bond Indexes

Green bond indexes function as benchmarks — that is, reference points to measure the performance of a portfolio or a sustainable investment strategy.

They gather a basket of bonds that meet strict eligibility criteria, usually based on international frameworks such as the Green Bond Principles (GBP) from ICMA or the EU Green Taxonomy.

The main indexes include:

• Bloomberg MSCI Green Bond Index
• S&P Green Bond U.S. Select Index
• ICE BofA Green Bond Index
• Solactive Green Bond Index

Inclusion Criteria: Much More Than Just “Green”

To be part of a green bond index, a bond must meet various criteria, such as:

• The allocation of proceeds, exclusively to environmental projects with measurable impacts
• The issuer must publish periodic reports detailing the allocation of funds and the environmental results achieved
• It is common for independent agencies such as Sustainalytics, CICERO, or Moody’s ESG to validate the bond’s eligibility
• Many indexes also impose minimum requirements for liquidity, maturity, and issuance volume to ensure replicability and efficiency in analysis

This rigorous selection helps avoid so-called greenwashing, meaning the practice of labeling financial instruments as “green” that, in practice, do not generate significant environmental impact.

Why Do Investors Use Green Bond Indexes?

1. Purpose-Driven Diversification

Green bonds offer exposure to a wide range of sectors — energy, transportation, construction, sanitation — all aligned with climate and sustainability goals.

2. ESG Risk Management

Green bond indexes help reduce exposure to issuers with high environmental liabilities or regulatory vulnerabilities related to climate, thereby strengthening portfolio resilience over the long term.

3. Comparability and Transparency

Using a benchmark like the Bloomberg MSCI Green Bond Index allows investors to compare portfolio performance with the market and adjust exposures based on standardized criteria.

4. Foundation for Financial Products

Several ETFs listed on U.S. exchanges use green bond indexes as their foundation, such as:

• iShares Green Bond ETF (BGRN)
• VanEck Green Bond ETF (GRNB)

Performance and Market Behavior

Historically, green bonds have shown performance similar to conventional bonds, reinforcing the idea that they also offer attractive returns.

Additionally, the green market has shown resilience during periods of climate or regulatory stress, with lower volatility linked to reputational risks of issuers.

The increase in demand for sustainable assets has also led to a phenomenon known as the “greenium” — a price premium (and yield reduction) for green bonds, driven by the relative scarcity of such instruments compared to demand.

Risks and Technical Consideration

• Limited liquidity, especially in secondary markets outside the core investment grade
• Concentration in sovereign and supranational issuers, which may reduce effective diversification
• Eligibility and reclassification risks, especially in the face of changes in international taxonomies and SEC/CFTC regulatory standards
• Currency risk, particularly for bonds denominated in foreign currencies that are part of global indexes

Outlook for the Future

With the progress of U.S. climate policies — such as the Inflation Reduction Act and tax incentives for clean energy — the domestic green bond market is expected to grow significantly over the next five years.

The U.S. Treasury has already issued its first green bonds and plans to expand this market in upcoming cycles.

Written by

Gabriel Gonçalves