Green bonds, which are becoming part of the fixed income component of environmental, social, and governance (ESG) investing, are rising in popularity, putting the spotlight on climate-focused ETFs like the newly introduced FlexShares ESG & Climate Investment Grade Corporate Core Index Fund (FEIG).
As more companies look to integrate ESG issues, or more specifically climate control, into their core business principles, it’s important to focus on this metric when bonds are offered to the public. As such, this is where an ETF like FEIG can identify opportunities in corporate bonds
Per FEIG’s launch sheet, the fund:
- Is designed as a cost–effective core building block of a portfolio incorporating risk controls to reduce tracking error and deliver market-like exposure relative to the starting universe.
- Applies a multi–dimensional ESG Framework incorporating exclusions across ESG controversies and business involvement while seeking to deliver ESG uplift.
- Uses the Northern Trust ESG Vector Score, which is focused on financial materiality and aligned with industry standards Sustainability Accounting Standards Board (SASB) and Tax Force on Climate Related Disclosures (TCFD), integrating not only historic metrics and indicators, but also those that assess how exposed a company may be to future risks and opportunities.
- Places intentional emphasis on reducing climate transition risk by reducing ISS carbon emissions intensity and improving ISS Carbon Risk Rating.
A Robust Scoring Methodology
With the universe of corporate bonds getting even bigger as companies are more apt to borrow money at the current historically low rates, it’s a daunting task to sift through them to find ESG opportunities. This is where FlexShares flexes its quantitative muscle using its Vector Score.
The Vector Score essentially identifies the magnitude in which ESG issues will impact financial performance. Then, magnitude is coupled with the direction of a company in terms of business risk associated with ESG.
“Part of a suite of funds that are designed to incorporate a comprehensive risk assessment across financially material ESG issues and by placing intentional emphasis on reducing climate transition related risks,” the launch sheet said. “The Funds draw on the Northern Trust ESG Vector Score which is a robust evaluation of financially material ESG issues incorporating both forward–looking and historically aware evaluation of financially material Environmental, Social and Governance (ESG) issues. The suite also seeks to reduce the climate transition risk of the resulting portfolio while maintaining market like exposure relative to its respective parent index.”
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