The growth of environmental, social, and governance (ESG) investing made its way into the bond markets, increasing the amount of issuance of green bonds over the last few years. As demand rose, so did prices, pricing some investors out of ESG bonds.
“Issuance of green, social, sustainable and sustainability-linked (GSSS) bonds as a percentage of total global bond issuance rose from roughly 2 per cent at the start of 2018 to a peak of over 12 per cent at the end of 2021, according to research by rating agency Moody’s,” a Financial Times report said.
“Prices continued to rise as that flood of debt hit the market because demand from investors exploded. Figures from data provider EPFR show that flows into ESG and socially responsible investing bond funds rose from a net of $4.2bn in 2018 to $102bn in 2021,” the report added.
However, as issuance has increased, prices for ESG bonds have been coming down. There are other options to consider when getting ESG bond exposure, such as exchange traded funds (ETFs).
A Corporate Bond Option With ESG
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.
- 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.
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