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The ESG offering of the fixed income ETF funds industry is being called into question this week following the findings of a survey of investors by Tabula Investment Management. According to the data a considerable number of larger investors in the fixed income funds are simply not satisfied.

Ten per cent of investors in fixed income ETFs feel the current ESG offering is poor, with another 29% describing it as average. Only 7% think it is excellent.

The research was based on feedback from professional investors based in the UK, France, Germany, Italy and Switzerland who collectively manage over US$140 billion in assets.

Investors in ETFs asking for more product innovation

In terms of how the fixed income ESG market could improve, 60% of professional investors surveyed say they would like to see more innovative products available. This is followed by 54% who would like to see better coverage across different fixed income asset classes, and 44% who want greater transparency. Four in ten want greater choice of fixed income ESG ETFs.

In relation to which asset classes within the fixed income space could see new or better ESG ETFs, 62% cite corporate credit, followed by 39% who say high yield credit and 39% who highlight emerging market exposure.

“Our research shows there is much room for improvement in the range of ESG fixed income ETFs. At Tabula, we are working hard to offer unique fixed income ETF solutions with a strong focus on ESG, innovation, and diverse exposures.”

Michael John Lytle, CEO of Tabula

Tabula said they were in the process of launching several new funds and exploring how to address investors’ needs and tackle the current gaps in fixed income solutions. “Every time we propose a new fund to clients, they share with us five other challenges facing their fixed income portfolios. It is a very dynamic environment, ripe with needs and opportunities,” Lytle admitted.

What does the universe of ESG friendly bond ETFs look like right now?

There are already quite a few large ESG bond funds available on the European market, which match the independent ESG criteria applied to them by independent ETF database TrackInsight. These include SPPU: SPDR Bloomberg SASB US Corporate ESG UCITS and the iShares EUR Corporate Bond ESG UCITS. Lyxor has its own offering, the ESG Euro Corporate Bond.

For example, TrackInsight applied an A+ rating to the BNP Paribas EASY JPM ESG EMU Government Bond ETF. This latter fund has received one of the highest sustainability ratings TrackInsight can hand out.

Working with Conser, TrackInsight has attached sustainability ratings to a broad range of fixed income UCITS ETFs. It is possible to rank bond ETFs based on their independently evaluated ESG criteria. Conser is a Swiss-based, independent consultancy which specialises in sustainable investing. Founded in 2007, it is considered a pioneer in independent third party ESG verification.

Conser uses a methodology which screens all of an ETF’s underlying assets, which are matched with a multi-scan ESG consensus. All bond  issuers in the portfolio are screened to identify sector exposure, breach of international norms, and climate impact. If aggregate assets reach a maximum threshold in some of the three categories monitored, the maximum grade is a B. Red flags are activated when the aggregate position’s weight exposed to a sensitive sector – say, bonds issued by tobacco companies – is greater than or equal to 1%.

Related

Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Graeme Andrew

Graeme Coles-Andrew

Graeme is Head of Technology at the Armchair Trader. He has worked in online financial investment publishing since 2000 as a website developer, advertising operations manager, data scientist and all-round go-to guy for online technical solutions.

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