Sustainable Bond Issuance Could Propel This ETF

Among the fixed income themes that market participants were focusing on entering 2023 were the possibility of a bond market rebound, which is materializing to some extent, and increased focus on the combination of bonds and environmental, social, and governance (ESG) principles in sustainable bonds.

Those factors could compel advisors and investors to evaluate exchange traded funds such as the Xtrackers Bloomberg  US Investment Grade Corporate ESG ETF (Cboe: ESCR). ESCR follows the Bloomberg MSCI US Corporate Sustainability SRI Sector/Credit/Maturity Neutral Index and holds 743 corporate bonds.

ESCR could prove pertinent this year as issuance of sustainable bonds increases as companies raise capital for green energy initiatives.

“We forecast that global issuance of green, social, sustainability and sustainability-linked (GSSS or sustainable) bonds will total around $950 billion this year – up 10% from an estimated $862 billion in 2022, but below the record volumes of $1.05 trillion recorded in 2021. Challenging macroeconomic and market conditions and greater scrutiny over perceived greenwashing will temper the overall pace of recovery,” noted Moody’s Investors Service.

As its name implies, ESCR broadly focuses on ESG principles, but often times in the fixed income space, it’s easier for corporate issuers to attain that label via debt dedicated to environmental and sustainable projects. As such, ESCR’s roster is loaded with bonds from companies in sectors that typically score well on a variety of ESG metrics. Financial services and tech issues combine for about 43.5% of the fund’s roster, according to issuer data.

Bolstering the long-term case for ESCR is the point that some issuers in carbon-intensive industries are actively looking for ways to reduce their carbon footprints. That requires capital, indicating that some of those firms could eventually bring bonds to market that are suitable for entry into ESCR’s underlying index.

“Companies in sectors with heightened inherent exposure to carbon transition risk will face growing pressure this year to follow through with credible implementation plans. Strengthening policy support for green capital spending in many countries, such as the Inflation Reduction Act (IRA) in the US, will also drive clean energy investments. As more issuers aim to finance their net-zero ambitions and transform their business strategies to adapt to rising policy and market risks, labeled sustainable bond issuance from companies in sectors highly exposed to carbon transition is likely to rise this year,” according to Moody’s.

Of note, at the end of last year, about 89% of ESCR’s holdings were rated “A” or “BBB,” indicating default risk is benign with the fund.

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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.