With the uptake of environmental, social and governance (ESG) in fixed income some way behind the adoption in equity strategies, the ESG boom in bond ETFs may just have begun, according to Matthieu Guignard, global head of capital markets and product development, ETF, indexing and smart beta at Amundi.

Speaking at ETF Stream’s ETF Ecosystem Unwrapped event, Guignard said since the introduction of regulatory frameworks such as the EU Action Plan on Sustainable Finance, Amundi is seeing more demand from clients seeking to incorporate ESG into their portfolios. 

This covers the rollout of Climate Transition Benchmark and Paris Aligned Benchmark indices, MiFID II ESG considerations and investment advice for clients, and the new Sustainable Finance Disclosure Regulation, which separates products into “non-ESG, generic ESG and sustainable”, which equate to the SFDR classifications Article 6, Article 8 and Article 9 respectively.

“The adoption of ESG was a bit quicker and earlier in equities but fixed income is really catching up this year,” Guignard continued. “From January to end of April 2021, almost half of flows into equity ETFs went into ESG ETFs but for fixed income over the same period, it was 100% of flows going into ESG, which shows a clear shift in clients moving out of vanilla ETFs and transitioning to ESG.”

Not only is this shift from vanilla to ESG core holdings still underway in fixed income but the roll-out of ESG bond products has yet to run its course.

Guignard said ESG is traditionally viewed as the preserve of equities, as only equity holders have voting rights. He argued the likelihood of passive strategies staying invested in a company for an extended period of time creates the possibility of long-term dialogue between investors and bond issuers, so voting is not the only form of interaction. Additionally, he points out that bond issuers are also often stock issuers and keen to attract more socially conscious investors they have become more forthcoming in supplying information.

Guignard added exclusions can be applied to corporate bond strategies in much the same way as in equity ETFs. However, incorporating ESG in developed market sovereign bond products can present more challenges due to the smaller number of issuers in the universe. Removing one or several constituents can introduce bias and adjust the risk profile of an ETF.

“For developed market government bonds, we reweight the portfolio by overweighting or underweighting each country according to ESG criteria,” Guignard said. “But this is a fairly light approach compared to what we do in equity and corporate bond portfolios, where you can exclude up to 75 or 80% of the original universe.”

However, for investors looking to incorporate sustainability into their emerging markets exposure, Guignard noted the number of potential issuers eligible for emerging market sovereign debt is much higher and therefore exclusions become more possible.