BlackRock’s Justin Wheeler on what is driving the ‘tectonic’ shift to fixed income ESG ETFs

The power of indexing in the fixed income ESG space

Tom Eckett

Justin Wheeler, head of iShares UK asset owner distribution at BlackRock, and Smadar Shulman, managing director and head of fixed income indices EMEA at S&P Dow Jones Indices, have said climate is the “next frontier” of fixed income ESG indexing.

Speaking to ETF Stream, the duo said there has been an increased focus on climate investing over the past 18 months as investors look to align their portfolios in the transition to net-zero.

While climate ETFs have been launched at a slower rate in the fixed income space versus equities, the area is starting to develop rapidly.

“Climate is the next frontier of fixed income ESG indexing and is the theme where there is product development occurring,” Wheeler continued. “Over the past 12-18 months, there has been a focus on the ‘E’ in ESG and climate is the leading piece in this story. At BlackRock, we believe climate risk is investment risk and by 2030, we forecast 75% of assets under management will have a transition to net-zero strategy in place.”

In late 2019, the EU released the Climate Transition Benchmark (CTB) and the Paris-Aligned Benchmark (PAB) which provide a framework for index providers and ETF issuers to launch climate solutions.

However, when constructing climate indices, Shulman stressed there are a number of additional considerations index providers need to consider that go beyond the European Union’s climate benchmarks.

However, along with the EU requirements, S&P Dow Jones Indices’ climate indices incorporate additional climate objectives in order to be aligned with the Taskforce on Climate Related Financial Disclosures (TCFD), for example. (S&P Dow Jones Indices, 2022)

The power of indexing

Elsewhere, Wheeler emphasised the benefits of indexing in the shift to sustainable investing. Not only can investors save on costs but they have a clear understanding of what is under the bonnet due to the rules-based nature of indexing, he argued.

However, he added many investors are still unsure about how they are going to address ESG within the fixed income bucket of their portfolios.

Overall, Shulman said the big difference between equities and fixed income in the ESG space is the “data mapping”. In fixed income, there is a range of entities in the corporate hierarchy issuing the debt which can be a challenge to capture.

“The strategy is only as good as the data. It is an important aspect that is often forgotten in the fixed income space. There are a lot of nuances around fixed income, so it is important to capture the data correctly.”

This article first appeared in ETF Insider, ETF Stream's monthly ETF magazine for professional investors in Europe. To access the full issue, click here.

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