The coronavirus outbreak isn’t going to stop environmental, social and governance (ESG) in its tracks. Even before the capital markets were tipped upside down, ESG was already a force and continues to be as Barclays Research announced that its incorporating ESG as part of its fundamental research tools.
“Prior to the outbreak of Covid-19, finance was already at a tipping point, where the integration of sustainability concerns was becoming the norm,” said Jeff Meli, Global Head of Research. “Today’s launch of Barclays’ Fundamental ESG Research is an opportunity to reflect on whether Covid-19 will accelerate this trend even further – creating a greater sense of urgency and responsibility toward everything from consumer behavior to climate change, supply-chain practices and the future of work and mobility – and potentially alter the nature of the investment process as a result.”
Like all markets, ESG took a hit within the S&P 500, but investors are still clamoring for sustainability in their investments:
^SPXESG data by YCharts
For ETF investors looking for ESG exposure within the fixed income asset class, they can look to the iShares ESG U.S. Aggregate Bond ETF (NYSEArca: EAGG). EAGG seeks to track the investment results of the Bloomberg Barclays MSCI US Aggregate ESG Focus Index, which has been developed by Bloomberg Barclays Capital Inc. with environmental, social and governance (“ESG”) rating inputs from MSCI ESG Research LLC pursuant to an agreement between MSCI ESG Research and Bloomberg Index Services Limited or an affiliate.
“IShares ESG U.S. Aggregate Bond ETF is a solid core-bond holding for ESG-minded investors,” wrote Benjamin Joseph in Morningstar. “This low-cost index fund looks a lot like the Bloomberg Barclays U.S. Aggregate Bond Index. That’s by design. It tracks the Bloomberg Barclays MSCI US Aggregate ESG Focus Index, which matches its sector weightings to that benchmark and only applies an ESG adjustment to the corporate-bond sector, and here the adjustment is modest.”
“The fund removes corporate-bond issuers with the lowest ESG scores from the eligible universe and uses an optimizer to tilt toward the highest-scoring issuers remaining,” Joseph wrote. “However, these adjustments must not take the fund’s expected tracking error relative to the Aggregate Index above 10 basis points per year, which limits the magnitude of this tilt, keeping it from just owning bonds from the highest-ranking issuers.”
Investors can almost think of EAGG as the iShares Core U.S. Aggregate Bond ETF (NYSEArca: AGG), but with an ESG tilt. AGG seeks to track the investment results of the Bloomberg Barclays U.S. Aggregate Bond Index, which measures the performance of the total U.S. investment-grade bond market.
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