Environmental, social, and governance (ESG) is spilling over into the fixed income arena in the form of green bonds, where credit risk will play a wider role.

A report, entitled “ESG Credit Trends 2022,” by ESG research firm Sustainable Fitch shows a strong correlation between ESG and potential credit risks. The byproduct is what’s already happening in the ESG space, which is more issuance of ESG-related bonds.

“Sustainable Fitch expects to see more sustainability and sustainability-linked debt issued in 2022 as investors combine climate and social objectives under single mandates,” a Pensions & Investments article says.

“In 2020, issuance of social and sustainability bonds nearly tripled from the previous year to more than $250 billion, mostly driven by government pandemic bonds providing social support to industries and workers affected by shutdowns, the report found. By contrast, the green market bond market grew about 8% in the same period,” the article adds.

A Pair of ETF Options in ESG

To add more ESG exposure to a portfolio, FlexShares has a pair of exchange traded fund (ETF) options. One such fund is the FlexShares STOXX Global ESG Impact Index Fund (ESGG).

Per the fund’s description, ESGG seeks investment results that correspond generally to the price and yield performance (before fees and expenses) of the STOXX® Global ESG Select KPIs Index. The index is designed to reflect the performance of a selection of companies that, in aggregate, possess greater exposure to ESG characteristics relative to the STOXX® Global 1800 Index, a float-adjusted market capitalization-weighted index of companies incorporated in the U.S. or in developed international markets.

The fund uses the index as its starting point and then sifts through companies, weeding out the following:

  • Companies that do not adhere to the U.N. Global Compact principles
  • Companies involved in controversial weapons
  • Coal miners

Investors who don’t want international exposure and would rather keep ESG investing in the U.S. can opt for the FlexShares STOXX US ESG Impact Index Fund (ESG), which seeks investment results that correspond generally to the STOXX® USA ESG Impact Index. The underlying index is designed to reflect the performance of a selection of companies that, in aggregate, possess greater exposure to ESG characteristics relative to the STOXX® USA 900 Index, a float-adjusted market capitalization-weighted index of U.S.- incorporated companies.

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