Is Fixed Income ESG Ready for Its Moment?

As equity-based environmental, social, and governance (ESG) exchange traded funds swelled in popularity in recent years, consistently breaking assets under management records for the category, a common refrain emerged. Advisors have asked: when will fixed income ESG ETFs join the party?

Source: Is Fixed Income ESG Ready for Its Moment?

The answer is it’s happening today, but when it comes to ESG bond ETFs, there’s still plenty of room for growth. Of course, issuers know this and the data is on their side when it comes to releasing related products to meet advisor and institutional investor demand.

“Many segments of institutional investors’ fixed income portfolios will be prioritized for deeper/more comprehensive ESG integration over the next three years, led by High Yield and Investment Grade Corporate,” according to a survey by State Street Global Advisors (SSGA).

The SSGA study also pointed out that 61% of investors polled say ESG integration in their fixed income is a high priority over the next several years while half of European investors are focusing on best-in-class approaches. Half of their North American counterparts “cite Impact as their preferred approach.”

On a global basis, investors plan to increase ESG allocations across six fixed income segments – junk bonds, investment-grade corporates, aggre­gate bond strategies, developed and emerging markets sovereign debt, and securitized bonds.

Many global professional investors are also keen to boost allocations to emerging markets debt.

“In the EMD space, institutional investors are most likely to use a combined active/index strategy for the EMD segment of their fixed income portfolio,” according to the State Street survey.

Thirty-eight percent of those polled say having exposure to Chinese bonds is a high priority, while another 27% say they plan to boost allocations to that asset class.

Broadly speaking, 42% of respondents are looking to increase exposure to emerging markets over the next three years, according to State Street. That could work in favor of passive bond funds because while active fixed income managers thrived in the first half of 2021, emerging markets were the one area where they were not able to beat benchmarks.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.