Demand for Sustainable Bonds Higher Despite Inflation Fears

Environmental, social, and governance (ESG) popularity has fully instilled itself in the bond market. Even with inflation fears bringing the general bond market down for much of 2022, save for a short summertime rally, ESG bonds have maintained their strong demand.

Credit rating company Moody’s is expecting record issuance as it increases the size of its staff in order to stay ahead of demand. This will likely be a persistent trend, as the move towards renewable energy will provide an added boost for funding green initiatives.

The company “is projecting $1 trillion in sustainable debt issuance this year — and has tripled staffing for providing reviews to ‘meet the needs of market participants,’ said Michael Simon, a Moody’s spokesperson,” per a Politico report.

“There have been 414 external reviews of sustainable bonds during the first half of 2022, according to Environmental Finance, a news and analysis service,” the report added.

This is all happening despite the Fed looking to raise interest rates in order to keep inflation in check. According to Environmental Finance data, the number of external reviews for green finance transactions (such as ESG bonds) is expected to near 2021 levels this year despite the Fed tightening and an overall weaker bond market.

ESG With Corporate Bond Yields

One option for fixed income investors looking for ESG bond exposure who also want the yield that corporate bonds can offer is the Vanguard ESG U.S. Corporate Bond ETF (VCEB). Additionally, the fund doesn’t command a high premium with its low expense ratio of 0.12%.

VCEB seeks to track the performance of the Bloomberg MSCI US Corporate SRI Select Index, which excludes bonds with maturities of one year or less and with less than $750 million outstanding, and it is screened for certain ESG criteria by the index provider, which is independent of Vanguard.

VCEB highlights:

  • Provides debt issues screened for certain ESG criteria.
  • Specifically excludes bonds of companies that the index sponsor determines are involved in and/or derive threshold amounts of revenue from certain activities or business segments related to adult entertainment, alcohol, gambling, tobacco, nuclear weapons, controversial weapons, conventional weapons, civilian firearms, nuclear power, genetically modified organisms, or thermal coal, oil, or gas.
  • Excludes bonds of companies that, as determined by the index sponsor, do not meet certain standards defined by the index sponsor’s ESG controversies assessment framework, as well as firms that fail to have at least one woman on their boards.

For more news, information, and strategy, visit the Fixed Income Channel.