An Active ESG Bond ETF Can Help Fixed-Income Investors Add Value

As we explore the current marketplace, fixed income exchange traded fund investors should consider what to look for from their external fixed income managers and ways that asset managers can add value.

In the recent webcast, Bonding Over Fixed Income: Beyond ESG Ratings and Labels, Janelle Woodward, president of MacKay Shields LLC, highlighted the growing demand for environmental, social, and governance principles among investments and how investors have targeted this growing market segment. Woodward explained that sustainable investing includes investment strategies that systematically consider ESG factors as a significant part of the fund’s investment thesis in order to respond to investors’ values and to seek financial returns.

An increasing number of institutional investors have been focusing on ESG considerations to meet their goals. When asked to list the main reasons for the heightened institutional interest, many investors highlighted factors like public pressure, client pressure, ESG leading to better financial returns, ESG leading to non-financial impacts, and ESG improving a company’s image.

Institutional investors have also indicated that the financial impact of ESG strategies when compared to traditional fixed income strategies has been positive or, at worst, neutral.

However, there is a slight disparity in the ESG focus between the U.S. and Europe. For example, European institutional investors have indicated that their major concern is ESG leading to non-financial impacts, and the majority have indicated their use of ESG ratings as a means to define the investment universe and assess the managers to peers. On the other hand, U.S. institutional investors are more focused on ESG improving their image, and they are less reliant on ESG ratings, but those who are tend to pay attention to how managers perform against benchmarks.

“In our role as a global asset manager, MacKay Shields upholds a steadfast commitment to its employees, the environment, and the community,” Woodward said.

“In partnership with our parent New York Life, we seek to effect change through corporate responsibility, including our commitment to responsible investing,” added Woodward.

MacKay’s approach to ESG seeks to eliminate uncompensated risk. ESG risk factors are key to its initial credit screens. Each team has a proprietary ESG rating system. External ESG resources supplement the company’s own.

Alexandra Wilson-Elizondo, deputy head of global credit & senior portfolio manager at MacKay Shields LLC, explained that external ESG resources are an input into credit research as a means to achieve attractive risk-adjusted returns by seeking to eliminate uncompensated risk. The credit research process incorporates internally-developed analysis as well as external data sources. Research analysts are responsible for determining those ESG risks deemed to be material.

Lastly, MacKay can engage with issuers in a bid to improve outcomes. For example, it tries to understand a company’s ESG policies, discuss what management believes ESG risks to be, inform management of best practices by peers and companies in other industries, create a dialogue so management is more receptive to feedback, see interaction as the best way to gauge progress towards milestones, and influence management on certain strategic decisions.

Investors can access the fixed income investment process through the recently launched IQ MacKay ESG Core Plus Bond ETF (ESGB), which focuses on investment in securities within the core bond universe that satisfy the environmental, social, and governance (ESG) criteria developed by MacKay Shields (MacKay), a fellow New York Life Investments boutique and a global asset manager focused on fixed income and equity investing.

ESGB is an actively managed strategy that seeks total return across a broad portfolio of fixed income securities while incorporating MacKay’s ESG analysis framework. The portfolio prioritizes issuers that demonstrate strong performance relative to peers across certain ESG metrics through selection and portfolio construction.

ESGB invests at least 80% of its assets in debt or debt-related securities, including government bonds, corporate bonds, mortgage, and other asset-backed securities, and could include fixed or floating rates of interest. The fund will generally seek to maintain a portfolio modified duration within 2.5 years (plus or minus) of the duration of the Bloomberg U.S. Aggregate Bond Index. Additionally, ESGB will invest at least 80% of its assets in securities that meet MacKay’s proprietary ESG methodology standards.

Financial advisors who are interested in learning more about green bonds and ESG investing can watch the webcast here on demand.