Investors asked and now they are receiving—it seemed the demand for environmental, social and governance (ESG) fixed income was only getting stronger as the space began to gain steam, and now, green bonds are beginning to sprout everywhere.
“The disruption caused by the COVID-19 pandemic has affected virtually every corner of the financial markets around the world,” a Bond Buyer article noted. “But one particular segment— the market for green bonds, or debt earmarked for specific environmental projects — has held up better than the broader investment-grade corporate market, in large part because it is less weighted toward cyclical sectors, such as oil and gas.”
“But there’s another important corollary of the pandemic bolstering the green bond market: A heightened level of investors’ attention and sensitivity toward social and environmental issue,” the article added. “A sensitivity that could represent the beginning of a long-lasting trend that may positively impact the market for green bond investing for years to come.”
As more and more investors seek refuge in the bond markets, which can fuel more growth in fixed income, product differentiation can help spur more innovation in the space. Exchange-traded fund (ETF) investors looking for broad-based ESG exposure can start their search with funds like the Vanguard ESG U.S. Stock ETF (ESGV).
ESGV seeks to track the performance of the FTSE US All Cap Choice Index, which is market-capitalization weighted, as well as composed of large-, mid-, and small-cap stocks of companies located in the United States that are screened for certain ESG criteria by the index sponsor, which is independent of Vanguard.
More ETF Options for ESG Exposure
Investors who want ESG exposure via an ETF wrapper can take look at the Xtrackers MSCI EAFE ESG Leaders Equity ETF (EASG). EASG seeks investment results that correspond generally to the performance of the MSCI EAFE ESG Leaders Index.
The fund will invest at least 80% of its total assets (but typically far more) in component securities (including depositary receipts in respect of such securities) of the underlying index. The underlying index is a capitalization-weighted index that provides exposure to companies with high ESG performance relative to their sector peers.
An additional fund to look at is the Xtrackers MSCI USA ESG Leaders Equity ETF (NYSE Arca: USSG), which has been a popular play for investors seeking exposure to socially responsible investments. USSG was developed in collaboration with Ilmarinen, Finland’s largest pension insurance company. The underlying MSCI USA ESG Leaders Index provides exposure to large- and medium-cap U.S. companies with high ESG performance relative to their sector peers.
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