ESG Bond Market Poised to Rev Up | ETF Trends

Amid soaring interest rates in the U.S., third-quarter issuance of ESG, sustainability, and related debt declined. But annual issuance of such debt is poised to be elevated — a theme that could carry over into 2024.

Enthusiasm for ESG and related forms of debt among professional investors could be a positive sign for ETFs such as the Calvert Ultra-Short Investment Grade ETF (CVSB). As things stand today, the fund is relevant on multiple fronts.

First, the September spike in 10-year Treasury yields compelled fixed income investors to continue embracing short-duration bonds. CVSB answers that call with a duration of 0.59 years. Second, the ETF is about three months shy of its first birthday. Since coming to market, the it has handily outperformed the Bloomberg 9-12 Months Short Treasury Index. Third, the outlook for ESG and related bond issuance is compelling.

CVSB in Focus Now

As has been widely documented, there’s growing demand for more high-quality ESG debt. There is also a clear need for more climate-related bonds to come to market. Those issues could be amplified over the near-term. That could be to the potential benefit of ETFs such as CVSB.

“The upcoming COP28 conference to be held in Dubai will focus on a number of key policy areas, including the conclusion of the first global stocktake to assess progress under the Paris Agreement,” noted Moody’s Investors Service. “Other priorities will include operationalizing the loss and damage fund established during COP27, advancing the global energy transition, catalyzing climate finance and transforming food systems. Progress in these areas would support global sustainable debt market activity, particularly with respect to sovereign issuance, transition finance, emerging market activity and adaptation-focused projects.”

Another benefit offered by CVSB is that it is actively managed. This indicates it can potentially do a superior job regarding greenwashing relative to competing passive strategies. Advisors and investors should not discount that perk.

“Risks around the perception of greenwashing are a potential threat to the continued growth of the sustainable bond market,” concluded Moody’s. “These risks may materialize because greenwashing can have significant unintended consequences for investors, issuers, regulators and other market actors. While recent regulatory developments, such as the Council of the European Union’s adoption of a new regulation to establish a European green bond standard, have potential to allay concerns around greenwashing, taxonomy usability remains a near-term challenge.”

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