Fixed income and ESG ETFs in Europe have been the two areas experiencing rapid growth over the past 18 months, however, the combination of the two is only just starting to see some momentum in terms of both innovation and distribution as flows begin to head into this relatively new area of the market.

Just like the early stages of implementing ESG with equity ETFs, an exclusion screener is most commonly implemented in these fixed income ESG ETFs, where the benchmarks exclude debt from companies that have involvement within any controversial activities from their respective parent indices.

European ETF investors are showing more interest in creating ESG portfolios as inflows are being directed towards these products, however, more so on the equity side. With that said, fixed income ESG ETFs are seeing their share grow, accounting for nearly a quarter of all ESG ETF inflows in October.

As the asset class looks set to see rapid growth, ETF Stream has selected five fixed income ESG ETFs, incorporating ETFLogic data, to consider in portfolios.

iShares € Govt Bond Climate UCITS ETF (SECA)

An ESG theme that burst onto the scene in 2020 focused on climate change, with many ETF and index providers launching Paris-aligned products. In October, BlackRock was the first issuer to launch a government bond climate ETF in the form of the iShares € Govt Bond Climate UCITS ETF (SECA).

It is comprised of euro-denominated investment grade government bonds that have a focus on climate considerations while offering higher exposure to countries less exposed to climate change risks and lower exposure to those that are more exposed to these risks.

With a total expense ratio of 0.09%, it tracks the FTSE Advanced Climate Risk-Adjusted European Monetary Union Government Bond index.

SECA is largely made up of debt from France and Italy, accounting for 34.4% and 31.2% of the ETF, respectively. The next largest issuer is Germany with 11.8% weighting.

Other factors SECA’s methodology takes into consideration are the issuers’ risk of sea level rising and the resilience of countries tackling climate change.

It only includes bonds with credit ratings of BBB or higher. AA-rated bonds account for nearly 46% of the ETF ahead of BBB with 31.6%.

Top 5 countries

Top 5 ratings

Top 5 maturities

France (34.4%)

AA (46%)

5-7 years (15.8%)

Italy (31.2%)

BBB (31.6%)

3-5 years (15%)

Germany (11.8%)

AAA (12%)

7-10 years (14%)

Spain (10%)

A (10.3%)

20+ years (13.9%)

Finland (4.2%)

Cash (0.2%)

10-15 years (12.6%)

Invesco GBP Corporate Bond ESG UCITS ETF (IGBE)

As an alternative to government bonds, there are also ESG corporate bond ETFs available. Invesco launched the Invesco GBP Corporate Bond ESG UCITS ETF (IGBE) in February, a month before the firm released its non-ESG version of the ETF.

IGBE tracks the Bloomberg Barclays MSCI Sterling Liquid Corporate ESG Weighted Bond index and incorporates ESG research by MSCI with a TER of 0.10%.

It is comprised of sterling-denominated investment grade bonds from the developed markets. The index has a hefty exclusions process by eliminating any securities with less than £350m par amount outstanding as well as any company that is involved in tobacco, weapons, thermal coal or oil sands.

To increase the ESG profile of the ETF, the weightings of the securities are adjusted depending on ESG scores.

Given the denomination of the ETF, the UK is the largest country exposure with 55.2% ahead of the US with 12.8%. Additionally, the credit ratings are slightly lower compared to SECA given the nature of corporate bonds but remain investment grade and therefore, 60.2% of the ETF is made up of BBB-rated bonds.

Top 5 countries

Top 5 ratings

Top 5 maturities

UK (55.2%)

BBB (56.6%)

5-10 years (28%)

US (12.8%)

A (34.7%)

10-20 years (27.8%)

France (9.5%)

AA (6.7%

20+ years (24.9%)

Germany (8.4%)

Cash (1.1%)

3-5 years (9.4%)

Netherlands (3.1%)

AAA (0.9%)

1-3 years (9%)

Lyxor Global High Yield Sustainable Exposure UCITS ETF (GHYE)

In February, Lyxor launched three high yield ESG ETFs including the Lyxor Global High Yield Sustainable Exposure UCITS ETF (GHYE) which is denominated in US dollars and has a TER of 0.25%. It is also available in a monthly euro hedged share class for an extra 5bps.

Tracking the Bloomberg Barclays MSCI Global Corporate High Yield SRI Sustainable index, it is comprised of bonds with at least one-year maturity and from issuers with MSCI ESG rating of BBB or higher.

GHYE also negatively screens issuers that are involved with controversial weapons and those with a red MSCI ESG Controversy score. This means the company has one very severe controversy currently ongoing which varies across environmental impact, human rights violations or governance malpractice.

The vast majority of the high yield bonds are government bonds and therefore mean a large volume of the bonds are highly rated. Similarly to SECA, GHYE is mostly made up of 5-7 year maturity bonds, however, long term duration bonds hold a significant weighting as 25+ year weighting is the second largest exposure with 29.5%.

Top 5 sectors

Top 5 ratings

Top 5 maturities

Government (71%)

AA (71%)

5-7 years (36.9%)

Consumer Discretionary (6.6%)

BB (18.4%)

25+ years (29.5%)

Technology (4.2%)

B (8.3%)

15-25 years (9.4%)

Health Care (4%)

CCC (2.3%)

7-10 years (8.3%)

Communications (3.8%)

BBB (0.1%)

1-3 years (7.6%)

Franklin Liberty Euro Green Bond UCITS ETF (FLRG)

While some fixed income ESG ETFs select bonds from the most sustainable debt issuers, some ETFs provide exposure to green bonds that are directly funding sustainable projects.

The Franklin Liberty Euro Green Bond UCITS ETF (FLRG) is actively managed and invests at least 70% of its assets into green bonds with the remainder being invested in climate-aligned bonds.

Franklin Templeton selects its securities from the Bloomberg Barclays MSCI Euro Green Bond index and has a TER of 0.3%.

Top five ESG ETFs

The proceeds of the debt have to be used within either alternative energy, energy efficiency, pollution prevention, sustainable water, green building, climate adaptation or other environmental activities.

FLRG offers diversity across the type of debt as the breakdown varies across corporate, government and sovereign debt. It does however have a slightly higher risk profile with BBB-rated bonds accounting for over a third of the ETF. AAA-rated bonds only account for less than 15%.

Top 5 sectors

Top 5 ratings

Top 5 maturities

Treasuries (30.8%)

BBB (37.5%)

5-7 years (27%)

Financial Institutions (25%)

A (26%)

15-20 years (20.1%)

Utility (13.6%)

AA (16.4%)

10-15 years (20.1%)

Industrial (9.6%)

AAA (15%)

7-10 years (16.9%)

Sovereign (5.7%)

BB (2.3%)

3-5 years (13.6%)

iShares J.P. Morgan ESG $ EM Bond UCITS ETF (EMSA)

Emerging market debt is becoming increasingly more popular among investors and there are ESG strategies available for those wanting an all-round ESG portfolio. However, there are only a few EM bond ESG ETFs to pick from.

The iShares J.P. Morgan ESG $ EM Bonds UCITS ETF (EMSA) is comprised of both investment grade and non-investment grade bonds issued by sovereign and quasi-sovereign entities.

It adjusts the weighting of the bonds depending on the ESG scoring of the issuer, with overweighting assigned to those with a greater ESG score.

EMSA also excludes issuers that are involved in controversial sectors such as weapons, thermal coal and tobacco as well as any companies that violate the United Nations Global Compact.

Offering exposure to emerging markets, it does come with a slightly higher TER of 0.45%.

Another important note to mention is the low weight allocated to China-listed debt with only 1.2%. Normally, China accounts for a significant portion of emerging market equity ETFs, however, the largest geography exposure for EMSA is the UAE.

This is also the only ETF of the list which is dominated by longer maturity debt as 20+ year maturity bonds account for over 30% of EMSA.

Top 5 countries

Top 5 ratings

Top 5 maturities

UAE (4.9%)

BBB (37%)

20+ years (30.3%)

Uruguay (4.7%)

B (21.3%)

7-10 years (16.2%)

Saudi Arabia (4.4%)

BB (16.4%)

5-7 years (14.3%)

Indonesia (4.2%)

A (13.3%)

3-5 years (14.1%)

Panama (4.2%)

AA (8.4%)

10-15 years (10.2%)

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