The Xtrackers J.P. Morgan ESG Emerging Markets Sovereign ETF (ESEB) tracks an index of debt issued by emerging market governments, but screens the securities based on environmental, social and governance factors, an investing style known by the acronym ESG. ESEB will exclude issuers that are involved in thermal coal, tobacco, weapons, or violations of the UN Global Compact principles. Each issuer is scored based on ESG criteria, then divided into five tiers. Those in the lowest tier are removed, and the remainder are weighted based on their tier, so that the portfolio tilts toward those securities with the highest ESG scores. Bonds that earn the “green” designation from the Climate Bond Initiative will be boosted up a tier. There are plenty of ESG funds, and plenty of emerging-market debt funds, but ESEB is unique in its combination of emerging market debt with an ESG screen. Better yet, ESEB’s management fee is below average for the emerging debt category.
Issuers have rolled out dozens of ESG-style funds in recent years to appeal to younger investors who are concerned about the social impact of their investments. ESG (the strategy, not the ticker) is different from traditional socially-responsible investing, which typically tried to exclude bad actors and industries. Many advisers worried that this came at the expense of diversification and returns. Today’s strategies aim to be more inclusive. Instead of ignoring large swathes of the market, the goal is maintain market-like diversification with a tilt toward the best corporate citizens. It’s worth nothing that there are plenty of skeptics when it comes to “green” bonds and ESG investing, and critics say ESG whitewashes a portfolio rather than driving companies to truly change their behavior. Investors who prefer plain-vanilla emerging market debt ETFs can take a look at the iShares JPMorgan USD Emerging Markets Bond ETF (EMB) or the Invesco Emerging Markets Sovereign Debt ETF (PCY).
Note: ESEB changed its name, objective and ticker in May 2020. It used to be the Xtrackers Emerging Markets Bond - Interest Rate Hedged ETF (EMIH).