Socially responsible investing has seen more growth on the equity side than in fixed income. William Sokol, product manager at VanEck, which issues the VanEck Vectors Green Bond ETF (GRNB), says ESG is just starting to take off in debt markets.
Although bondholders can’t vote proxies the way equity shareholders can, there’s been greater engagement between bond issuers and investors about issuers’ sustainability credentials. That’s new to the fixed-income world, he notes.
ESG data metrics are sorely lacking for fixed income, but third-party raters like MSCI or Sustainalytics are starting to look at the broader activities of the bond issuer. But Sokol notes these assessments are still subjective.
It’s one reason green bonds are gaining traction, he says, because the bond focuses on the project, not necessarily the issuer’s credentials, which may or may not follow ESG principles.
“You just look at what the bond is financing, and that’s all fully disclosed before the bond is issued,” Sokol says.
Finkelman says more consensus about best practices and strategies is critical for further ESG adoption. Some progress is being made, and one group helping to bring consensus to the industry is the Sustainability Accounting Standards Board, which develops and disseminates sustainability accounting standards. With more evidence showing that socially responsible strategies can deliver enhanced returns, the next step is deciding the right way to implement ESG analysis.
“There’s still more work to be done on reaching consensus across the market about what it is with ESG that can help drive returns, and what approaches really do best,” he said.
There are still a number of socially responsible ETFs with low AUM because of this lack of consensus on why ESG works, Finkelman says. But as more data is collected and the data time series grows, why ESG factors perform may become clearer.
That could mean some socially responsible investing ETFs close, but Finkelman says that could be good, since “the product will be more robust going forward and more stable perhaps.”
As ESG evolves, Tim Clift, chief investment strategist at Envestnet | PMC, says he’d like to see ESG reporting advance to a level where investors can compare how their portfolios stack up against broader indexes.
“I’d love to see what my carbon footprint is compared to the broad index …,” he said, “that my carbon footprint in this portfolio is 50% less or 80% less than the benchmark.”
That may take more data than is currently available, but Clift says that could have a powerful effect on investors: “That’s much more impactful when you open up your statement. Not only did I do something good at the beginning, but it’s actually doing what [the ETF issuer] said they’re going to do.