How Advisors Use ESG Bond ETFs

November 14, 2019

As environmental, social and governance (ESG) investing has taken off, investors have been increasingly seeking ways to invest their values across their entire portfolios, not just the equity portion.

Currently, though, ESG pickings among bond ETFs remain slim. There are only nine fixed income ETFs that FactSet categorizes as socially responsible, with a handful of other thematic funds that arguably also fit the bill.

That hasn't stopped advisors from making it work, however. spoke with several advisors who use socially responsible and ESG investments for their clients to see how they approach their fixed income allocations. Here’s what they had to say: Why do you use ESG bond ETFs for your clients?

MAYA PHILIPSON, Principal, Robasciotti & Philipson: We embraced fixed income ETFs because the units for individual fixed income purchases are so high that it's really difficult to get into a proper asset allocation unless your client has multimillions of dollars. You can purchase stocks for $10 or maybe $100/share, but a bond starts at maybe $1,000 and goes up to $10,000.

We like fixed income ETFs for ESG investments, specifically, because we can do more targeted investments. Equity funds use more exclusionary screening: They screen out companies that make weapons, tobacco, private prisons. In the fixed income space, we can actually support companies, municipalities, programs that are more in line with the values of our clients. It's more proactive.

SCOTT ARNOLD, Partner & portfolio manager, IMPACTfolio: We view ESG integration as part of our fiduciary duty to improve the risk/return characteristics of a portfolio. There's an MSCI study from 2017 that looked at high ESG-rated versus lower ESG-rated companies, and the bottom line was, even if you didn't care about the environmental or social benefits of ESG investing, it's just a great way to reduce risk for both equities and fixed income.

Companies with high ESG ratings tend to have less risk, and their cost of capital is lower. That helps them have higher cash flow, which then can lead to higher ratings from the various [credit] rating agencies. That helps make the company more profitable and reduces the chance of a downgrade or default in the future. It's a positive feedback loop. Which specific ESG bond ETFs do you use?

JOHANN KLAASSEN, EVP & CIO, Horizons Sustainable Financial Services: We use GRNB [the VanEck Vectors Green Bond ETF], NUBD [the Nuveen ESG U.S. Aggregate Bond ETF], the Sage ESG Intermediate Credit ETF (GUDB) and the Invesco Taxable Municipal Bond ETF (BAB).

BAB used to track Build America Bonds [author's note: Build America Bonds were a special category of taxable municipal bond issued in the wake of the 2008-09 financial crisis], but they never really caught on, so [Invesco] switched the fund's focus. The concept was very good; Build America Bonds were designed with green, community-building plans in mind. As far as I can tell, BAB is still doing the same kind of work, just without the Build America Bond labeling.

Arnold: 100% of our fixed income allocation is split among various ESG ETFs. We're big fans of the NuShares line of ETFs.

For example, we really like NUBD. The risk/return characteristics of NUBD are almost identical to AGG [the iShares Core U.S. Aggregate Bond ETF] or BND [the Vanguard Total Bond Market ETF], so an advisory firm using those funds could substitute some of that current broad exposure with the Nuveen equivalent. You won't give up any performance, but you're starting to align the portfolio better with your firm's or your clients’ values. You're also reducing portfolio risk.

Philipson: One of the ESG ETFs I use is the PIMCO Intermediate Municipal Bond Active ETF (MUNI). It's not marketed as an ESG ETF, per se. But when I started looking at the holdings, I realized it met my stringent criteria for “socially responsible investing.” I could actually purchase a nonmarketed ESG index fund that would get me the same thing as one of those marketed ESG funds, but for much cheaper.

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