ESG Bonds Could Bounce Back in 2023 | ETF Trends

In 2022, the widely observed Bloomberg US Aggregate Bond Index posted its worst annual showing since its inception in 1976. That is to say, plenty of corners of the bond market stand as credible 2023 rebound candidates.

That group includes both corporate debt and bonds with the environmental, social, and governance (ESG) designation. On that note, the SPDR Bloomberg SASB Corporate Bond ESG Select ETF (RBND) is among the fixed income exchange traded funds that might be worthy of consideration in 2023.

RBND, which follows the Bloomberg SASB US Corporate ESG Ex-Controversies Select Index, could be among the corporate bond ETFs in the spotlight this year because, after a decline in issuance last year, ESG bond issuance is forecast to rebound in 2023.

“ESG bond volumes swelled over the past few years but dropped by 22% in 2022 amid a broader slowdown in corporate bond issues, as companies faced significantly higher borrowing costs due to aggressive monetary tightening actions by global central banks fighting inflation,” reports Reuters. “Corporate ESG bond issuance fell to $362 billion last year from $461 billion a year earlier, Barclays said in a credit research note. It expects ESG bond sales to grow by 30% this year and rebound to almost the same levels of 2021, predominantly driven by green bonds.”

RBND holds 461 bonds with an average maturity of 10.85 years. The fund debuted in November 2020 and could be ready to shine this year because more governments and corporations are committing to climate-related spending – much of it on a sizable scale.

While climate expenditures are expected to pay long-term dividends for a variety of stakeholders, the upfront costs are hefty, indicating many would-be spenders need to tap debt markets to reach climate goals. Enter corporate debt issuance.

“Shifting the planet’s energy system away from fuels that emit greenhouse gases will cost $2 trillion a year by 2030, according to estimates from the International Energy Agency,” notes Reuters. “Companies can secure cheaper financing through green bonds, Barclays said, and their relative appeal has increased even further as investors doubted the key performance indicators used in the less mature sustainability-linked securities.”

RBND, which carries an option-adjusted duration of 7.18 years, could also be appealing to risk-averse income investors due to the fund’s investment-grade profile and when considering credit spreads on highly rated corporate debt have been stable for several months. Over half of the RBND lineup is rated somewhere in “A” territory.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.