Fixed income is widely viewed as prime territory for expansion of environmental, social, and governance (ESG) investing principles.
Fortunately, there are already some positive factors to consider. First, the landscape of fixed income ESG is already expanding. Second, thus far, ETF issuers aren’t pushing the envelope, meaning that advisors and investors who want ESG-based bond strategies don’t have to embrace exotic fare.
Consider the the SPDR Bloomberg SASB Corporate Bond ESG Select ETF (RBND). RBND, which turns two years old in November, follows the Bloomberg SASB US Corporate ESG Ex-Controversies Select Index. Its objective is simple: provide investors with exposure to corporate debt issued by companies that are unlikely to be epicenters of ESG-related controversies. That’s a concept market participants can wrap their heads around.
“Increasingly, today’s fixed-income market presents unique opportunities for responsible investing in the form of environmental, social and governance (ESG) labeled bonds. These relative newcomers to the market can give their corporate, sovereign or securitized issuers a welcome ESG halo and could even lower their cost of debt by attracting new investors. In turn, investors are drawn to ESG-labeled bonds because they can deliver a measurable—and meaningful—social or environmental impact,” according to Harvard Law School.
The idea of avoiding ESG controversies is a straightforward approach, and an admirable one at that, but without the benefit of a crystal ball, RBND may not bat 0.1000 on that objective. However, although it’s passively managed, it can take steps to keep investors away from problem areas.
Take credit quality as one example. It’s not unreasonable to assume that some companies with ESG issues don’t sport robust credit quality. For its part, RBND features strong credit quality, as over 54% of its 449 holdings are rated AAA, AA, or A.
Between a no-nonsense approach and stout credit quality, a case can be made that despite the fact that RBND isn’t old in ETF terms, it’s already out in front of some important issues facing this fund category.
“Unfortunately, as demand surges for responsible investing choices and the market for ESG-labeled bonds balloons, so too do the challenges. It’s tricky for investors to select bonds with the right structures and features that will meet their ESG promises as advertised. That’s why investors and their bond managers must have a disciplined framework for assessing ESG-labeled bonds,” added Harvard Law.
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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.