Demand for ESG Fixed Income Products Exceeds Supply

The challenge to bring ESG investing into wider investor adoption faces various obstacles, but more education and marketing towards these products, equities or fixed-income, can help increase awareness of these products.

“The inclusion of ESG factors in fixed income is becoming more widespread, with ESG data and ratings now available for most investment-grade credit issuers, as well as a large proportion of high-yield issuers,” said Ilonka Oudenampsen, senior analyst in European institutional research at Cerulli. “In addition, there have been several important innovations in the fixed-income space, including the rise of green bonds and the emergence of social bonds and bonds linked to the [United Nations]’ sustainable development goals.”

Flight to Short Duration

In the general bond market space, the trend continues to be investors fleeing to short-term debt found in investment vehicles, such as short duration exchange-traded funds (ETFs). The flight to debt with shorter maturities reflects the move from “risk-on” to “risk-off” as U.S. equities, particularly technology sector giants like FAANG stocks (Facebook, Amazon, Apple, Neflix, Google-Alphabet), have been racked by volatility the last couple of months.

“Investors seem to be struggling with whether international equities offer an upside alternative to a US environment weighed by future rate hikes, tenuous trade relations and slowing corporate growth,” said Brian Gilman of Virtu Financial. “Domestically, the shift to risk-off is most apparent and it’s in the headlines and on the TV every day. The darling FAANG stocks are in a bear market and the high beta, growth names associated with them are no longer in favor.”

Investors can look to ETFs, such as the SPDR Portfolio Short Term Corp Bd ETF (NYSEArca: SPSB), which seeks to provide investment results that correspond to the performance of the Bloomberg Barclays U.S. 1-3 Year Corporate Bond Index. Another option is the iShares 1-3 Year Credit Bond ETF (NASDAQ: CSJ), which tracks the investment results of the Bloomberg Barclays U.S. 1-3 Year Credit Bond Index where 90 percent of its assets will be allocated towards a mix of investment-grade corporate debt and sovereign, supranational, local authority, and non-U.S. agency bonds that are U.S. dollar-denominated and have a remaining maturity of greater than one year and less than or equal to three years.

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