Most bond investors believe that environmental, social, and governance (ESG) factors are important when making investment decisions but need more data than what’s out there. A survey of 111 fixed income investors conducted by analytics firm found that 90% believe ESG is important to their decision-making, with more than half classifying ESG as very important. Nearly 85% of respondents said they’re looking for more ESG capabilities, and almost half feel there is a lot of room for improvement.
More than half of survey respondents said it was important to incorporate ESG in fixed income portfolios to perpetuate corporate values, while another 35% identified risk management as an attractive factor. However, only about a third of investors have fully integrated ESG into their risk analysis because of a dearth of data.
Respondents cited data challenges as the biggest obstacle to achieving their ESG goals. These challenges include concerns about greenwashing and inconsistent ratings. A lack of reliable ESG data can hinder investors’ ability to quantify risk.
Coalition Greenwich’s senior analyst Stephen Bruel is quoted in as saying: “If you don’t have reliable ESG data about an issuer or issuance, then it’s harder to calculate what the negative consequences might be.”
Bruel added, however, that a lack of sufficient data is to be expected in a nascent field, but once technology advances and regulations are finalized, that should help things.
“The tools need to improve to ensure investors who are interested in allocating their capital to ESG-friendly investments are able to form a complete picture of the issuer and issuance,” Bruel said.
Global ESG assets will exceed $40 trillion this year and are on track to hit $50 trillion by 2025, according to Bloomberg Intelligence. So, ESG investing is clearly gaining momentum.
Fixed income investors wanting to incorporate ESG principles into their portfolio while mitigating risk concerns may want to check out the Vanguard ESG U.S. Corporate Bond ETF (VCEB ). VCEB seeks to track the performance of the Bloomberg MSCI U.S. Corporate SRI Select Index, which includes U.S. dollar-denominated, investment-grade, fixed-rate, taxable bonds with greater than one-year maturity.
To be included in the index, securities are screened for certain ESG criteria. VCEB specifically excludes bonds of companies that engage in adult entertainment, alcohol, gambling, tobacco, nuclear weapons, controversial weapons, conventional weapons, civilian firearms, nuclear power, and thermal coal, oil, or gas.
Additionally, the index also excludes bonds of companies that do not meet certain standards defined by the index sponsor with respect to an ESG controversies assessment, as well as companies that do not meet certain diversity criteria.
VCEB carries an expense ratio of 0.12%.