Complement Your Fixed Income Portfolio With This ESG ETF | ETF Trends

Environmental, social, and governance (ESG) investing is expanding in the bond market, allowing for greater diversification that can complement a fixed income portfolio.

At the same time, the low-rate environment is causing fixed investors to seek alternate sources of yield, including high-risk debt. Now, investors can obtain high yield while focusing on the niche ESG theme of climate change in one fund: the FlexShares ESG & Climate High Yield Corporate Core Index Fund (FEHY).

“When ESG was still just a niche, strategies that used it were offered mainly as standalone products,” FlexShares explained on their product website. “But innovative asset managers began to see the value of adding an ESG lens within traditional investment portfolios.”

“For example, FlexShares has seen how ESG considerations can support strategies designed to meet specific investor outcomes, such as generating income,” FlexShares added. “We also believe that it’s important for dividend strategies to identify companies that offer investors the best opportunity of maintaining their payments. Assessing the financial health of that company is the traditional place to start. Using ESG data, we also can examine non-financial risks that may affect a company’s ability to make its dividend payments.”

Additionally, the heart of FEHY includes an ESG Vector Score. FEHY seeks investment results that correspond generally to the price and yield performance of the Northern Trust ESG & Climate High Yield U.S Corporate Core Index.

“The ESG Vector Score is designed to focus on ESG-related business issues most likely to impact a company’s financial performance — and ultimately, a portfolio’s investment return,” a FlexShares Fund Focus said. “Our scoring methodology employs a framework established by the Sustainable Accounting Standards Board (SASB), that identifies 26 categories of general sustainability issues that affect company performance. Then, SASB determined which of those issues are most relevant to a particular sector or industry.”

Green Bond Financing on the Rise

The introduction of FEHY comes at an opportune time. While ESG-focused equities have gotten the most attention in terms of products, more fixed income options are becoming available as evidenced by a rise in “green bonds.”

“And while ESG funds have been a reigning winner—both from a return perspective as well as a social perspective—in recent years, interest is increasing in green bond financing within the $46 trillion U.S. bond market,” a Financial Advisor article said.

“The fixed income market is approximately $120 trillion globally—and green bonds are the fastest growing area in the fixed income markets,” the article added. “Today’s green bond market, however, is only the start. If you think about it like a baseball game, we’re only in the second inning—and the green bond market, along with ESG as a whole, have a long way to go.”

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