Does ESG investing have a greater impact in fixed income?

Flows into ESG bond products outpaced those of their vanilla equivalents during the first eight months of the year

Jamie Gordon

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ESG has typically been the preserve of equity investors through the impact of engagement, however, fixed income could finally be seeing its moment in the sustainable sunlight.

Having lagged far behind equities’ incorporation of ESG, fixed income ETFs made up considerable ground at the start of 2021. Highlighting this, fixed income ESG ETFs pulled in €13.4bn this year, as at the end of August, versus €12.2bn for vanilla strategies, according to data from Bloomberg Intelligence.

For the dual purposes of capturing existing demand and creating new demand, ETF issuers have played their part by launching record numbers of fixed income ESG strategies in a short span of time. In fact, ESG fixed income product debuts have outpaced their non-ESG counterparts since the start of the year with 43 launches versus 34, according to Bloomberg Intelligence.

This includes the Vanguard ESG Global Corporate Bond UCITS ETF (V3GD) which launched in May and the iShares Global Aggregate Bond ESG UCITS ETF (AGGE) which came to market last month.

Furthermore, the SPDR Bloomberg SASB US Corporate ESG UCITS ETF (SPPU) launched last October. SPPU has been the posterchild of fixed income ESG’s coming of age amassing $5.7bn assets under management (AUM) in less than a year.

For equities, the ESG calling card is the potential for engagement. Much as owning shares is attractive because there is the tangible benefit of owning a piece of a company, engagement opportunities are attractive as they afford asset owners a proportionate stake of decision-making power which is most often exercised during voting processes.

While the same mechanism is lacking in fixed income ETFs, their proponents argue passive investing allows a dialogue to build up over the long-term between investors and bond issuers meaning voting is not the only avenue for interaction. Furthermore, bond issuers are also often stock issuers and are therefore keen to attract more socially conscious investors. This means they are equally forthcoming in supplying information to investors in either asset class.

However, while there is a strong overlap in the investment universes of ESG equities and corporate bonds, there are some unique exposures that can only be accessed via fixed income.

One such case is development bank bond ESG ETFs with products such as the UBS ETF Sustainable Development Bank Bonds UCITS ETF (MDBUA) allowing investors to gain exposure to bonds issued by the World Bank, Asian Development Bank, European Bank for Reconstruction and Development, Inter-American Development Bank and African Development Bank which raise funds for projects to alleviate poverty, improve infrastructure and protect the environment.

There is also the option of combining ESG with sovereign debt within the ETF wrapper. However, the process of ranking the virtues of different countries’ policies has come under fire for not only being inherently subjective but also for instances where governments’ green policies might be used as justification for downplaying current transgressions, including fossil fuel extraction, military incursions overseas and human rights abuses.

Overall, investors should expect to see the further roll-out of fixed income ESG ETFs. For now, it might be said fixed income offers some unique routes for ESG exposure. Whether they are the most impactful form of ESG investment will only be fairly answered once the dust settles and issuers take a moment to reflect on and refine their product ranges.

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