Capital at risk. The value of investments and the income from them can fall as well as rise and is not guaranteed. Investors may not get back the amount originally invested.
Sustainable investing has been around for years in equity markets, but is a more recent addition to the fixed income landscape. Global assets invested in sustainable fixed income ETFs have dramatically expanded: in the seven years from January 2015 to December 2021, they have risen almost 40-fold from 1.4 $Bn to 50 $Bn, compared to an increase in traditional fixed income ETFs from over 400 $Bn to 1.8 $Tn over the period.1
It was in against this backdrop that BlackRock recently organised a roundtable discussion on the Paris Aligned Fixed Income Benchmark in partnership with MSCI and Bloomberg, featuring Chris Hackel (Index Product Manager and Head of Sustainable Indices, Bloomberg), Michael Ridley (Executive Director and Global Head of Fixed Income ESG & Climate Research, MSCI) and Divya Manek, CFA (Head of Investment Grade Credit & Emerging Market Debt, BlackRock). The roundtable was directed by Jerome Folcque, Director, BeLux Head of Asset Managers & Asset Owners at BlackRock.
How can ETFs help fixed income investors achieve their sustainable goals?
Resiliency
Sustainable fixed income ETFs rated higher than their conventional peers on the ability to resist in a challenging environment, showing a better bounce-back during "risk-off" periods (times during which investors seek to reduce risk). During February and March 2020 (onset of Covid), ESG indexes outperformed across several fixed income categories, including emerging markets, US investment grade, and US high yield.2
Index performance returns do not reflect any management fees, transaction costs or expenses. Indices are unmanaged and one cannot invest directly in an index.
Improved sustainability profile
Fixed income ETFs allow investors to incorporate sustainability into existing portfolios or build new portfolios with specific sustainable objectives. For example, investors can replace their investment-grade bond fund with a sustainable option; this one adjustment could have a notable effect on an overall portfolio’s ESG score. Say, an investor is invested in an investment-grade bond with a relatively high carbon-intensity score of 310. Switching this holding for a sustainable equivalent with a carbon-intensity score of 95 could raise a portfolio’s overall ESG score by circa 10%.3 The sustainable option has a much lower carbon emissions intensity, and a stronger ESG score.
"The Climate Fixed Income Indexes from MSCI and Bloomberg enable investors to build on industry-leading climate data while aligning with the low-carbon transition. Investors are increasingly seeking ESG and Climate integration and in these indexes, can leverage MSCI’s four decades of experience, data, research and insights to bring increased clarity to this traditionally opaque asset class.” Michael Ridley (MSCI)
Reasonable cost
At individual investment level, ETFs can lend affordable and efficient access to sustainable fixed income markets. They allow market participants to increasingly incorporate ESG aspects into their investments, providing portfolio resilience. They are transparent, accessible, liquid and efficient, making these instruments increasingly useful tools for improving the sustainability of fixed income portfolios.
1 Source: BlackRock and Morningstar as of 31/12/2021. 2 Source: BlackRock as of 31/12/2021. Based on stress tests by Risk and Quantitative Analysis team on different hypothetical market scenarios - comparing performance of the ESG index to its Parent index. Sample tested included USD IG ESG represented by Bloomberg MSCI US Corporate Sustainable SRI Index, USD IG Parent represented by Bloomberg US Corporate Index, EUR IG ESG represented by Bloomberg MSCI Euro Corporate Sustainable SRI Index, EUR IG parent represented by Bloomberg Euro Corporate Index, USD HY ESG represented by Bloomberg MSCI US Corporate High Yield Sustainable BB+ SRI Index, USD HY Parent represented by Bloomberg US High Yield Index, EUR HY ESG represented by Bloomberg MSCI Euro Corporate High Yield Sustainable BB+ SRI Index, EUR HY Parent represented by Bloomberg Euro High Yield Index, EM ESG represented by JP Morgan ESG EMBI Global Diversified, EM Parent represented by JP Morgan EMBI Global Diversified. 3 Source: Bloomberg MSCI index, as at 30/12/2021. Statement based on the results of comparing Bloomberg MSCI US Corporate Sustainable SRI Index (sustainable index) to Bloomberg US Aggregate Corporate Bond Index (Parent index).
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Risk Warnings
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
This information should not be relied upon as research, investment advice, or a recommendation regarding any products, strategies, or any security in particular. This is for illustrative and informational purposes and is subject to change. It has not been approved by any regulatory authority or securities regulator. The environmental, social, and governance (“ESG”) considerations discussed herein may affect an investment team’s decision to invest in certain companies or industries from time to time. Results may differ from portfolios that do not apply similar ESG considerations to their investment process.
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