Whether you call it green, social, or another derivative of environmental, social, and governance (ESG) strategies, this corner of the fixed income space remains small compared to the broader bond market. Still, it’s experiencing rapid growth.
That could be good news for exchange traded funds such as the Calvert Ultra-Short Investment Grade ETF (CVSB). Having debuted in January, CVSB is younger compared to other fixed income ETFs. Still, the population of ESG bond ETFs still sparse. The Calvert fund could have a leg up as the ESG bond market expands. Data confirms that’s exactly what happening today.
Recent data from S&P indicate that the total of green, social, sustainable, and sustainability-linked bonds (GSSSB) sold this year could be in the $900 billion to $1 trillion, bringing total issuance to around $4 trillion.
More Positive Signs for CVSB
More signs could augur well for the actively managed CVSB. For example, GSSSB issuance accounted for 13% of all bond issuance in the first half of 2023 and that percentage could rise to 14% to 16% by the time this year ends, notes S&P.
“However, the S&P analysts acknowledge some headwinds to GSSSB issuance, such as rising interest rates, risk of recession in developed markets and rising anti-ESG sentiment in the US, which has seen some states push to prevent public finance issuers labelling their bonds as GSSSB,” reported Elliot Gulliver-Needham for Investment Week.
Indeed, interest rate risk is top of mind for many fixed income investors. It’s possible the Federal Reserve deploys another rate hike before the end of this year, and it’s likely rate cuts won’t arrive until well into 2024. However, CVSB has the goods for muting rate risk because its duration is just 0.61 years.
Other data points confirm that despite its rookie status, CVSB could be at the right place at the right time because inflows to ESG bond funds remain solid and the number of bond funds with the ESG label is increasing.
“Meanwhile, Bank of America data revealed that throughout the first seven months of the year, ESG bond funds recorded inflows of $21bn, close to the $22bn of inflows recorded throughout all of 2022,” according to Investment Week. “In July alone, the assets under management of global ESG bond funds surged by $42bn, the highest monthly AUM increase since 2020. The BofA data also found that by the end of June 2023, 12.2% of global bond funds were classified as ESG funds.”
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