The environmental, social, and governance (ESG) movement may have caught on with the equities crowd, but it’s spilling over into fixed income popularity as well.
Per the Financial Times, the “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.”
“Prices continued to rise as that flood of debt hit the market because demand from investors exploded,” the Financial Times added. “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.”
Despite the rise, there are headwinds that are affecting the overall bond market. Recession fears could cause ESG bond issuance to drop as companies become more hesitant to rely on bond income in an uncertain economic environment.
Nonetheless, there’s always an appeal for ESG bond investors looking to mesh their ideals and principles with their investing strategies. Corporate bonds can also offer more yield in lieu of more default risk if investors are willing to make the compromise.
A Green Bond ETF to Consider
Investors looking to get ESG exposure can also add the yield potential of corporate bonds. Both features are available in the Vanguard ESG U.S. Corporate Bond ETF (VCEB).
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 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.
- Has a low expense ratio of 0.12% and a 30-day SEC yield of 4.06%, as of June 9.
For more news, information, and strategy, visit the Fixed Income Channel.