Incorporating ESG into your corporate bond portfolio

You can gain exposure to corporate bonds from issuers meeting strict ESG criteria

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Incorporating ESG into your corporate bond portfolio

Corporate bond markets are much more diverse than those for government bonds, with exposure to companies operating in a variety of sectors. In addition to the number of years to maturity and the currency in which the bonds are issued, corporate bond investors also have a choice in terms of the issuing companies’ credit quality and even how the businesses are managed.

Corporate bond ETFs can include those aiming to avoid certain sectors and emphasise companies with strong environmental, social and governance (ESG) characteristics. They provide investors with low-cost core elements for constructing diversified ESG portfolios. 

Investment Grade (IG) Corporate Bond ESG ETFs

Investment-grade ETFs can be in either USD, EUR or GBP currencies and follow an indices that has been created to increase overall exposure to those issuers demonstrating a robust ESG profile and that meet minimum size and liquidity requirements.

Securities are excluded from the index if the issuing company:

  • Has an MSCI ESG rating below BB (or does not have a rating);
  • Has faced very severe controversies pertaining to ESG issues over the last three years;
  • Is involved in alcohol, adult entertainment, controversial weapons, conventional weapons, fossil fuels, gambling, genetically modified organisms (GMOs), civilian firearms, nuclear weapons, nuclear power, oil sands, thermal coal, tobacco, or unconventional oil and gas; or
  • Is domiciled in an emerging market country.

Remaining securities may have an ESG score that has been assigned using MSCI ESG metrics. This ESG Score is used to re-weight the eligible securities from their natural (market capitalisation) weights by applying a factor tilt in favour of constituents with higher ESG Scores.

High Yield Corporate Bond ESG ETFs

High-yield ETFs may follow indices with similar methodologies as their investment-grade counterparts. The exclusions may be the same as those listed above, although global high-yield ETFs may include issuers from developed and emerging markets. As with the investment-grade ETFs, global and USD high-yield ETFs may also be designed to re-weight eligible securities using their ESG Scores.

  • The value of investments, and any income from them, will fluctuate. This may partly be the result of changes in exchange rates. Investors may not get back the full amount invested.

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  • Data as at 31 January 2023, unless otherwise stated.

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