Investors are increasingly interested in sustainable and impact investment products and investing with environmental, social, and governance (ESG) considerations in mind. In fact, results of a new study from Coalition Greenwich show that most global institutional fixed income investors plan to invest more in ESG-labeled fixed income funds, with more than 90% of survey respondents looking to expand their allocations to these types of bonds.
“The fact that institutional investors are almost unanimous in their embrace of ESG-labeled bonds should provide a boost of confidence to the organizations and firms working to build out the infrastructure for sustainable investments,” said Stephen Bruel, senior analyst at Coalition Greenwich Market Structure & Technology and author of “The Continued Maturation of Fixed-Income ESG Investing.”
Investors are increasing allocations to ESG-labeled bonds for two main reasons: to align with their own corporate values, and in response to pressure from stakeholders. However, nearly half of respondents said they’re investing in these products for the performance.
“Given the obligation to generate returns, asset managers believing that the performance can be positive is another encouraging sign that one does not have to sacrifice returns to achieve other goals,” Bruel added. “Even still, yields remain vital and if ESG bonds do not perform then portfolio managers will be forced to look elsewhere for returns.”
See more: “Bond ETFs 101: A Refresher”
Investors looking to increase their allocation to ESG-labeled corporate bonds may want to look into the Vanguard ESG U.S. Corporate Bond ETF (VCEB). The fund seeks to track the performance of the Bloomberg MSCI U.S. Corporate SRI Select Index, a market-weighted corporate bond index that measures the investment return of investment-grade U.S. dollar-denominated bonds and is screened for certain environmental, social, and corporate governance criteria. Its index includes fixed-rate, taxable bonds with a maturity of more than one year.
VCEB specifically excludes bonds of companies that the index provider determines engage in, have a specified level of involvement in, and/or derive threshold amounts of revenue from certain activities or business segments related to the following: adult entertainment, alcohol, gambling, tobacco, nuclear weapons, controversial weapons, conventional weapons, civilian firearms, nuclear power, and thermal coal, oil, or gas.
Additionally, VCEB’s index excludes bonds of companies that, as determined by the index provider, don’t meet certain standards defined by the index provider with respect to an ESG controversies assessment, as well as companies that do not meet certain diversity criteria.
VCEB had a 30-day SEC yield of 5.01% as of April 6 and carries an expense ratio of 0.12%.
For more news, information, and analysis, visit the Fixed Income Channel.