The Right Bond ETF for Stringent ESG Setting | ETF Trends

The regulatory spotlight is on companies and their environmental, social, and governance claims. It would not be surprising to see this trend reverberate in the bond market, indicating that investors who want to embrace ESG fixed income strategies need to be selective.

An idea to consider is the SPDR Bloomberg SASB Corporate Bond ESG Select ETF (RBND). RBND, which came to market in November 2020, tracks the Bloomberg SASB® US Corporate ESG Ex-Controversies Select Index. Fortunately for investors, the RBND methodology is easy to comprehend.

The ETF “seeks to track an index that is designed to exclude securities involved in and/or which derive significant revenue from certain controversial business practices, industries or product lines and utilizes ESG scores to help weight the bonds, while also minimizing active total risk versus the Bloomberg US Corporate Index,” according to State Street.

RBND’s objective and methodology are relevant today because regulators are putting more emphasis on clear ESG definitions and potential punishments for companies overstating those credentials. Those are important considerations in the corporate bond market because ESG offenders can potentially be credit risk offenders, too.

“The SEC is proposing that companies begin disclosing in their annual reports and elsewhere how they manage climate-related risks,” says Morningstar analyst Leslie Norton. “The proposal also calls for companies to disclose the gamut of their greenhouse gas emissions, including the thorny, hard-to-track scope 3 emissions in their supply chains, if the latter are significant. (Scope 1 refers to a company’s direct emissions, and scope 2 refers to emissions related to its power use.)”

RBND holds 444 bonds, and in this environment, the ETF’s 30-day SEC yield of 3.38% qualifies as tantalizing. The fund’s option-adjusted duration is 7.95 years, according to issuer data, putting it in intermediate-term territory.

RBND’s ESG foundation is rooted in Sustainability Accounting Standards Board guidelines, which backstop a scoring methodology that rates an issuer’s ESG credentials relative to companies in the same industry.

“In addition, the SEC is considering a requirement that companies disclose how their boards and managers handle climate-related risks, identify how climate-related risks would materially affect their financial statements over the short and long terms, and report any transition plans they have adopted,” adds Norton.

Bottom line: RBND is a potentially useful addition to investors’ fixed income portfolios, particularly for those seeking added yield or a sound avenue to ESG fixed income.

For more news, information, and strategy, visit the ESG Channel.

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.