Stockholm (NordSIP) – At the start of July, two trends conspired to bring new focus to the ESG Green bond market. On the one hand, there are no signs of the demand for green bonds slowing down, with the Climate Bonds Initiative foreseeing the market growing by 80% in 2021 compared with the previous year. At the same time, increased risk appetite following the consolidation of a positive outlook on the COVID-19 pandemic means that ETF managers can provide investment opportunities across the risk spectrum.
Lyxor Focuses on Euro Sovereigns
To answer the continued appetite for green bonds and the rise in sovereign issuance in Europe, Lyxor Asset Management launched the Lyxor Euro Government Green Bond (DR) UCITS ETF. This launch follows last week’s announcements of new net-zero CO2 emission objectives for the EU.
According to the asset manager the world’s first ETF tracking sovereign Eurozone green bonds. “Until today, a strong and diversified sovereign segment was the missing link in the green bond market. We’ve now reached a point where any investor can and should have a green bond strategy as part of a fixed income portfolio. This launch will help investors pursue their net zero carbon objectives by giving them more clarity on the use of proceeds of their investments, including in their core sovereign bond allocation”, commented François Millet, Head of ETF Strategy, ESG and Innovation at Lyxor Asset Management. “As pioneers of the ETF green bond market, Lyxor is constantly striving to fuel innovation on this market, as this launch shows” added Philippe Baché, Head of Fixed Income ETF Product at Lyxor Asset Management.
The Lyxor Euro Government Green Bond (DR) UCITS ETF was listed on Euronext on July 6th and tracks the Solactive Euro Government Green Bond Index, which covers investment grade-rated green bonds issued by Eurozone countries. Eligibility in the index is conditional on approval by Climate Bonds Initiative. Asides from their investment grade, the bonds must have at least €300 million outstanding, be issued by governments of the Eurozone, have a remaining maturity of at least one year and denominated in euro.
Invesco Feeds Risk Appetite
At the other end of the Risk spectrum, Invesco launched the Invesco USD High Yield Corporate Bond ESG UCITS ETF offers investors low-cost passive exposure to the high yield corporate bond market with an ESG tilt.
The ETF tracks the Bloomberg Barclays MSCI USD High Yield Liquid Corporate ESG Weighted SRI Bond Index, which excludes bonds with an MSCI ESG rating below BB or have no rating. Companies involved in very severe ESG controversies over the last three years and those that do not have an MSCI ESG Controversy Score are also excluded. Other exclusions cover companies involved in the sale of alcohol, adult entertainment, controversial weapons, conventional weapons, genetically modified organisms, firearms, nuclear weapons, nuclear power, oil sands, thermal coal, tobacco. Emerging market issuers are also not included in the index. The remaining securities are then reweighted based on the size of the notional size of the bond. Issuers are capped at 5% to reduce concentration risk.
“We believe investors, the environment and society as a whole should all have the opportunity to benefit from the growth of opportunities to invest more responsibly. ETFs offer investors even greater choice to express their principles while meeting financial objectives, not only in their equity allocation but increasingly other asset classes, especially fixed income. We expect this trend to continue over the coming months and years,” Gary Buxton, Head of EMEA ETFs and Indexed Strategies at Invesco says.
Invesco appears to have focused on risk during July. During the same month, the asset manager also launched the Invesco MSCI Emerging Markets ESG Universal Screened UCITS ETF on the back of the same trend.
“If we start out looking at the broad asset class, we see the current environment could favour taking credit risk over duration for income investors wanting a pick-up in yield, particularly if inflation continues raising the prospects of Fed rate hikes,” says Paul Syms, Head of EMEA ETF Fixed Income Product Management at Invesco. “Strong economic recovery would also typically support risk assets such as high yield. The next consideration is on sustainability and the picture being painted by investor flows is vivid. In the first six months of the year, 73% of net flows into fixed income ETFs were into funds incorporating ESG filters.”