Demand for ESG Fixed Income exposure is soaring, with ETFs seeing a surge in AuM.
Fixed income has historically trailed equities in environmental, social and governance (ESG) investing. But things are changing fast. Of the €32bn that flowed into Europe UCITS fixed income ETFs in 2022, €21bn was collected by ESG funds, equating to 65% of total bond fund inflows1. Investors now have more options to invest sustainably in fixed income than ever before, and it doesn’t stop here.
A slow start, but catching up fast
Progress to integrate ESG considerations into bond portfolios has been relatively slow. Consider that the first equity ESG index was launched in 1990, yet the first ESG bond index did not appear until 2013. This comes down in part to engagement factors. Bondholders lack the voting rights of shareholders, encouraging the misconception that they have a limited ability to engage with and exert influence on companies.
But, over recent years, things have shifted and ESG has gained significant traction in the fixed income markets.
This comes on the back of a growing body of evidence suggesting that incorporating ESG analysis into fixed income investing can reduce idiosyncratic and portfolio risk and may contribute to more stable returns2.
Hence, asset managers have been working hard to develop solutions that integrate ESG into fixed income. ESG factors are playing a more important role in credit ratings, and bond investors are increasingly engaging directly with companies, holding them to account on ESG issues. Keen to attract ESG investors and gain inclusion to major ESG indices, bond issuers are now much more forthcoming with information.
Source: Amundi ETF/Bloomberg as of December 2022
Covid-19: A booster shot for ESG investing
Covid-19 acted as a catalyst for the adoption of ESG investing by shifting investor focus to sustainable finance. The crisis also highlighted the resilience and growth potential of ETFs. Amid the market volatility that followed the pandemic outbreak, ETFs proved themselves nimble and resilient. Bond ETFs, in particular, traded in large volumes, even in segments with dwindling liquidity. Their versatility was recognised by monetary authorities, including the Federal Reserve, Bank of England and the BIS, who highlighted ETFs’ role in price discovery, particularly within fixed income.
Demand for fixed income ESG ETFs has subsequently soared. Between 2020 and 2022, European fixed income ESG ETF assets under management multiplied three-fold, from €20 billion to over €60 billion1. Over the same period, the proportion of European fixed income ETFs incorporating ESG criteria has more than doubled from 10% to 24%1, giving investors even more options to invest sustainably.
ETFs: The vehicle of choice to implement ESG in fixed income
In our view, rising investor appetite for fixed income ESG ETFs will continue to drive product innovation and choice for investors, and we see great opportunities for fixed income to further grow its share of sustainable assets globally.
Tried and tested, ETFs are increasingly being embraced as the vehicle of choice to implement ESG fixed income in portfolios and we expect continued innovation and assets under management in these dynamic tools to surge. This should ultimately lead to greater choice for investors, enhancing their ability to incorporate sustainability in portfolios reflecting their investment beliefs and objectives.
Knowing your risk
It is important for potential investors to evaluate the risks described below and in the fund’s Key Investor Document (“KID”) and prospectus available on our website www.amundietf.com.
CAPITAL AT RISK - ETFs are tracking instruments. Their risk profile is similar to a direct investment in the underlying index. Investors’ capital is fully at risk and investors may not get back the amount originally invested.
UNDERLYING RISK - The underlying index of an ETF may be complex and volatile. For example, ETFs exposed to Emerging Markets carry a greater risk of potential loss than investment in Developed Markets as they are exposed to a wide range of unpredictable Emerging Market risks.
REPLICATION RISK - The fund’s objectives might not be reached due to unexpected events on the underlying markets which will impact the index calculation and the efficient fund replication.
COUNTERPARTY RISK - Investors are exposed to risks resulting from the use of an OTC swap (over-the-counter) or securities lending with the respective counterparty(-ies). Counterparty(-ies) are credit institution(s) whose name(s) can be found on the fund’s website amundietf.com. In line with the UCITS guidelines, the exposure to the counterparty cannot exceed 10% of the total assets of the fund.
CURRENCY RISK – An ETF may be exposed to currency risk if the ETF is denominated in a currency different to that of the underlying index securities it is tracking. This means that exchange rate fluctuations could have a negative or positive effect on returns.
LIQUIDITY RISK – There is a risk associated with the markets to which the ETF is exposed. The price and the value of investments are linked to the liquidity risk of the underlying index components. Investments can go up or down. In addition, on the secondary market liquidity is provided by registered market makers on the respective stock exchange where the ETF is listed. On exchange, liquidity may be limited as a result of a suspension in the underlying market represented by the underlying index tracked by the ETF; a failure in the systems of one of the relevant stock exchanges, or other market-maker systems; or an abnormal trading situation or event.
VOLATILITY RISK – The ETF is exposed to changes in the volatility patterns of the underlying index relevant markets. The ETF value can change rapidly and unpredictably, and potentially move in a large magnitude, up or down.
CONCENTRATION RISK – Thematic ETFs select stocks or bonds for their portfolio from the original benchmark index. Where selection rules are extensive, it can lead to a more concentrated portfolio where risk is spread over fewer stocks than the original benchmark.
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