Fixed Income ESG: A Growing Trend for ETFs

Investments made through an environmental, social and governance (ESG) lens posted a record year in 2020 in assets gathered, taking in €44 billion ($51 billion) in Europe alone, comprising around 40% of total European investment inflows [1]. Even in the worst of the sell-off, in March 2020, no money exited these strategies, according to Athanasios Psarofagis, an ETF analyst at Bloomberg Intelligence.

European asset manager Amundi reports that ESG ETFs took in €730 million ($874 million) in March 2020, while the overall European ETF market reported record outflows [2].

With the long-term horizons that tend to characterize ESG investments, investors are more likely to maintain their positions despite market volatility, as panicked redemptions would seem counterproductive to such an outlook. Further, assets pulled out of mainstream equity funds were subsequently reinvested into ESG-focused strategies, according to Amundi. ESG holdings tend to be seen as “pandemic-proof” in terms of the sectors in which they invest; healthcare and new technology for instance, rather than traditional sectors as energy or materials [3].

Since the first ESG ETF was launched in 2002, 1,537 are now listed globally [4] and product innovation has been rife in recent years to meet the growing investor demand and respond to the many shades of green within ESG investing, in fact there were almost 200 ESG ETFs launched in 2020 alone [5].

When considering so much choice, the initial asset class selection presents just one of the crossroads. Equities might have formed the backbone of most ESG ETFs to date but innovation in the fixed income space is gaining traction, reflecting rising interest. Annual flows into European fixed income ESG ETFs were €520 million ($623 million) in 2018 and grew to €3.5 billion ($4.2 billion) in 2019, while the level of these inflows in 2020 plus January and February of this year surged to €16 billion ($19 billion), according to Amundi.

In line with this broader industry trend, the group has itself witnessed accelerated growth within its fixed income franchise, with several reasons cited.

“Not only did fixed income ESG ETFs demonstrate resilience during last year's market turbulence, investors are also becoming more comfortable with ESG investing overall, therefore gaining confidence in looking beyond their equity allocation to incorporate sustainable investments across other asset classes.

“As the market matures due to better—and more widely accessible—data, it follows that more products come to market, giving investors greater choice and further fueling that appetite. One could describe it as a virtuous circle,” says Matthieu Guignard, Global Head of Product Development and Capital Markets at Amundi ETF, Indexing and Smart Beta.

This trend plays to the combined strengths of Amundi, Europe’s largest asset manager, which has over 40 years’ experience investing in bond markets and manages more than €790 billion ($945 billion) of fixed income assets. Amundi holds a leading position in responsible investing, and the group is focused on product development to meet the increasing level of investor interest.

Fixed income ESG ETFs exist in a more complex landscape than their equity counterparts.

There was once a perception that fixed income managers faced greater difficulty when engaging with their underlying issuers compared with shareholders, and that transparency was more limited.

The landscape has, however, changed as the sector has started to mature. When it comes to influencing their portfolio companies, Amundi’s Guignard points out that voting rights are only one tool at an asset manager's disposal. “Fixed income managers might not have voting rights, but that doesn’t stop them engaging,” he explains. “In many cases, bond issuers are also stock issuers, so large asset managers like Amundi will also be engaging and voting as a shareholder,” effectively doubling down on the influence they can apply.

With bond issuers particularly keen to demonstrate their ESG credentials and attract socially conscious investors, many are recognizing that information disclosure and transparency are essential in this regard, adding to the more readily available information from third-party ESG information providers on once-neglected areas, such as government debt.

From indexes designed around ethical bonds that finance particular environmental causes or projects, to corporate or sovereign debt screened to exclude companies engaged in controversial activities, investors have numerous ETFs along the green spectrum from which to choose.

Investors keen to diversify their portfolios beyond equity ETFs will be eager to see where asset managers, such as Amundi, focus their ESG efforts.

Learn more about Amundi’s approach to responsible investing

SOURCES

1. https://s3.amazonaws.com/bizzabo.file.upload/rGA0TjEbS2i4HgsvJ82X_Amundi%20ETF%20Presentation%20-%20Athanasios.pdf
   
2. https://reports.etfstream.com/downloads/etf-scan-investigating-the-rise-of-esg.pdf
3. https://research-center.amundi.com/article/day-after-3-covid-19-crisis-and-esg-transformation-asset-management-industry
   
4. https://etfgi.com/news/press-releases/2021/03/etfgi-reports-assets-invested-esg-etfs-and-etps-listed-globally-reached
5. https://www.trackinsight.com/news/esg-etf-assets-surge-three-fold-record-setting-2020-etfs/#:~:text=With%20nearly%20200%20new%20Active,1%2C052%20listed%20on%20exchanges%20worldwide