Fixed income environmental, social and governance (ESG) funds are still in their early stages of growth, and that’s encouraging, but there are some data points that market participants still need to be educated about the benefits of marriage. ESG/bonds.
Recent research from risk assessment firm Verisk Maplecroft indicates that some professional investors are buying bonds issued by countries with worse ESG profiles than Russia, and that’s saying something. Some of these countries include Angola, Bolivia, Iran, Nigeria, and Venezuela.
When it comes to corporate bonds, investors of all stripes have the opportunity to access the benefits of ESG principles, including SPDR Bloomberg SASB Corporate Bond ESG Select ETF (RBND). RBND holds 448 bonds, indicating that it has a deep bench among ESG bond funds.
As with any traded index fund, methodology is important to RBND. This is even more true at a time when ESG ETFs and mutual funds are the subject of much criticism.
RBND “can be used as an ESG building block as it seeks to track an index designed to exclude controversy and maximize the ESG R-FactorTM score on which the benchmark is based, which is based on Sustainability Accounting Standards Board (‘SASB’) materiality framework, while controlling risk parameters,” according to State Street.
Avoiding controversy is a valid goal, as companies that are ESG delinquents can reflect that risk on a credit level. Additionally, it is possible that as a result of an ESG controversy, an offending company could suffer a credit rating downgrade, thereby punishing bondholders. On a related note, approximately 55% of RBND’s holdings are rated AAA, AA or A.
Then there is growth. As financial markets are plagued with uncertainty, one certainty is that more corporate issuers will seek to bring more ESG-friendly debt to market in the coming years, potentially sparking more interest. for funds such as RBND.
“In addition to regulators, business leaders, rating agencies and other stakeholders continue to debate what ESG means and what characteristics should qualify products to be covered under its positive cloak. Specifically in the loan and debt markets, annual global issuance of sustainable debt (including sustainability bonds and loans and green and social bonds and loans) continues to grow exponentially, doubling by more than 769, $1 billion for 2020 to $1.689 billion in 2021, with the largest increases in sustainability-related lending volume,” according to Reuters.
For more news, insights and strategy, visit the ESG Channel.