Bond ETF Investors Should Consider ESG Theme Potential

Socially responsible investments have become an increasingly popular theme in the equities space, and fixed-income investors may also have the opportunity to retrofit their portfolios with a green bond exchange traded fund to potentially enhance overall returns while maintaining a socially responsible mindset.

“Managing exposure to ESG factors is a growth opportunity for fixed income asset managers, displays potential for outperformance globally, and is a value-added risk management technique on an ex-post and ex-ante basis,” writes Pat Reilly, V.P, Sales manager, Fixed Income, FI Analytics, said in a FactSet research note, referring to environmental, social and governance factors.

Green funds remain a popular play, especially over the past decade as rising concerns over climate change helped fuel the investment theme. The investments typically draw younger and more environmentally minded investors who see profits in the nascent green industry.

Reilly argued that the idea that environmental and social pillars are morality plays for fixed-income investors as they are the right thing to do, whereas the governance pillar is seen as instrumental in maintaining capital preservation.

By incorporating ESG principles, bond investors are exposed to many credit analysis processes that go beyond traditional market cap-weighted methodologies.