Are Sustainability-Linked Bonds The Next Big Thing in ESG?

The rise of environmental, social and governance (ESG) investing is causing providers to offer new products to help differentiate themselves from the masses. One of the newest offerings could become the next big thing in ESG–sustainability-linked bonds.

“Finance chiefs are selling a new type of bond designed to attract socially minded investors that costs less and offers more leeway for companies than other types of sustainable debt,” a Wall Street Journal article said. “These instruments, known as sustainability-linked bonds, are similar to traditional debt sales—with one major exception: They are usually structured such that companies pay a higher interest rate to investors if they fail to achieve a set of environmental and other goals before the maturity date. Also, the proceeds from these bonds can be used for general purposes, such as paying down existing debt, which sets it apart from other types of green, social and sustainability bonds.”


^MSACWIESGF data by YCharts

Where can ETF investors find quality ESG funds? Here are a few to consider:

  1. iShares ESG Aware MSCI USA ETF (ESGU): seeks to track the investment results of the MSCI USA Extended ESG Focus Index. The fund generally will invest at least 90% of its assets in the component securities of the underlying index and may invest up to 10% of its assets in certain futures, options and swap contracts, cash and cash equivalents. The underlying index is optimized index designed to reflect the equity performance of U.S. companies that have favorable environmental, social and governance (“ESG”) characteristics (as determined by the index provider), while exhibiting risk and return characteristics similar to those of the MSCI USA Index (the “parent index”).
  2. iShares MSCI KLD 400 Social ETF (DSI): seeks to track the investment results of the MSCI KLD 400 Social Index composed of U.S. companies that have positive environmental, social and governance characteristics. The fund generally invests at least 90% of its assets in securities of the underlying index and in depositary receipts representing securities of the underlying index. The underlying index is a free float-adjusted market capitalization index designed to target U.S. companies that have positive environmental, social and governance (“ESG”) characteristics.
  3. FlexShares STOXX Global ESG Impact Index Fund (CBOE: ESGG): ESGG seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the STOXX® Global ESG Impact Index. The index is designed to reflect the performance of a selection of companies that, in aggregate, possess greater exposure to environmental, social, and governance characteristics relative to the STOXX® Global 1800 Index, a float-adjusted market-capitalization weighted index of companies incorporated in the U.S. or in developed international markets. The fund will invest at least 80% of its total assets in the securities of the index and in ADRs and GDRs based on the securities in the index.

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