SUSTAINABLE FIXED INCOME INDEXING

A guide for understanding the relationship between returns, risk and sustainability in fixed income indexing

Whale swimming

IN BRIEF

  • How sustainable bond indexing can help embed long-term resilience in portfolios.
  • Ways that fixed income ETFs can increase sustainability attributes in portfolios.
  • 4 primary approaches to incorporating sustainability into fixed income allocations.

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

Sustainable investing has historically been most prominent in the equity market, however ETFs are helping bring affordable and efficient access to sustainable fixed income markets.

To illustrate this, global assets in sustainable fixed income ETFs have grown 36x since 2015 to $50bn1.

GLOBAL ASSETS IN SUSTAINABLE FIXED INCOME ETFs

Source: BlackRock and Morningstar as of 31/12/2021. Sustainable funds classified by Morningstar of 31/12/2021.

All investors can increasingly link sustainability with fixed income portfolio resilience, measured by lower volatility and drawdown risk, and higher credit quality. 

In addition to these investment benefits, fixed income investors may also implement specific ESG objectives into their allocations such as carbon intensity reduction in preparation for the transition to a lower carbon economy.

Because of their transparency, access, liquidity and efficiency as well as rules-based methodologies, sustainable fixed income ETFs can help investors increase their portfolio’s sustainability profile whilst seeking to achieve desired portfolio outcomes.

Source: ‘Built to last: Sustainability and bonds’, BlackRock as of 10/03/2022.

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1BlackRock and Morningstar as of 31/12/2021. Sustainable funds classified by Morningstar as 31/12/2021.