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The devastation of the Australian bushfires brought the very real effects of climate change to the forefront of investors’ minds. Now more than ever, many investors are looking to put their dollars to work towards a sustainable future.
Many investors will be aware of our three equity-focused ethical equities ETFs: the Australian Sustainability Leaders ETF (ASX: FAIR), the Global Sustainability Leaders ETF (ASX: ETHI) and the recently-launched Global Sustainability Leaders ETF – Currency Hedged (ASX: HETH). Whilst these ETFs provide investors with an ethical equities exposure, the Australian market in the past has lacked an ASX-traded ethical bonds exposure.
Enter the Sustainability Leaders Diversified Bond ETF – Currency Hedged (ASX: GBND), which invests in bonds issued by a wide range of government and corporate issuers that meet stringent environmental, social and governance (ESG) screening criteria, and holds at least 50% bonds that directly help finance environmentally-supportive projects. GBND is not only a viable product for investors seeking an ethical bond ETF, but also can be used as the global fixed income core of a fully diversified ethical portfolio.
True to label exposure
To be eligible for inclusion in the index that GBND tracks, bond issuers must pass a demanding screening process. Issuers are excluded if they are materially involved in the fossil fuel industry or are exposed to other activities that carry significant ESG risks, including gambling, tobacco, and human rights and supply chain concerns (certain materiality thresholds may apply).
In addition, at least 50% of the index at each rebalance will comprise ‘green bonds’. To be included as a green bond, a bond must be certified by the Climate Bonds Initiative (CBI). The CBI certifies as ‘green bonds’ fixed income investments that clearly earmark at least 95% of proceeds towards financing climate-friendly projects1. Such projects can include those designed to prevent or reduce pollution, improve the sustainable use of natural resources, or help in transitioning to clean energy.
Take for example the French Republic Green OAT Bond. Launched in 2017, the bond raised €7 billion, and since then, the proceeds have been used for sustainable forest management, energy renovations in housing, and funding for studies into fighting climate change2. Through such bonds, investor capital is being used to build a more sustainable future.
A little closer to home, Woolworths Group launched its own domestic green bond last year, making it the first supermarket retailer in the world to do so. The capital raised will be put towards installing solar panels, LED lighting and developing low-carbon supermarkets3.
Most green bond issues are oversubscribed, with demand coming particularly from mainstream institutional investors with public commitments to responsible investment4. The rapid growth of the green bond market reflects a global interest in fixed income products that finance sustainable projects.
Even COVID-19 has not slowed the rapid pace of new issues, with the CBI estimating US$350 billion of new green bonds will be issued this year5. Figure 1 demonstrates the growth of green bond issuances since 2017.
Figure 1: Global Green Bond Issuance (2017 – 2020)
Source: Climate Bonds Initiative
Core fixed income – with a bonus
Most green bonds are on an equal footing with equivalent non-green bonds from the same issuers in terms of their pricing6. This presents investors with an opportunity to gain a core international fixed income exposure that meets strict ethical standards without necessarily being subject to additional underlying costs.
Interestingly, a recent whitepaper published by Fidelity indicated that bonds issued by firms with higher ESG scores on average outperformed bonds issued by their lower-rated counterparts during the COVID-19 crash7.
The difference in performance between the index GBND aims to track and a 50/50 domestic and international bond portfolio has been negligible over the long term. Figure 2 demonstrates the high correlation between the two exposures:
Figure 2: Performance of GBND’s Index vs Bloomberg Barclays Global Aggregate Bond Index and Bloomberg AusBond Composite Index (50/50 blend): March 2014 – 24 July 2020
Source: Bloomberg. Does not take into account GBND’s fees and costs. Inception date for GBND is 26 November 2019. This chart includes back-test data. Past performance, whether actual or simulated, is not indicative of future performance of any index or GBND.
The complete ethical suite
Bonds have long played an important role in providing investors with portfolio diversification, defensive properties and regular income. Investors are now able to build a diversified ethical portfolio with exposure to both bonds and equities, all via the ASX, with the BetaShares ethical suite:
- Sustainability Leaders Diversified Bond ETF – Currency Hedged (ASX: GBND)
- Australian Sustainability Leaders ETF (ASX: FAIR)
- Global Sustainability Leaders ETF (ASX: ETHI)
- Global Sustainability Leaders ETF – Currency Hedged (ASX: HETH)
Investment risks include market risk, international investment risk, non-traditional index methodology risk and foreign exchange risk (for ETHI and GBND), as well as interest rate risk and credit risk (for GBND) and currency hedging risk (for GBND and HETH). For more information on risks and other features of each fund, please see the applicable Product Disclosure Statement available at www.betashares.com.au.
1. “Explaining Green Bonds.” Climate Bonds Initiative, 19 Feb. 2019, climatebonds.net/market/explaining-green-bonds.
2. “Green OAT Allocation and Performance Report for 2018” Agence France Trésor, 19 Jul. 2019, https://www.aft.gouv.fr/en/green-oat.
3. “Woolworths Group First Globally to Issue Certified Green Bonds for a Supermarket – Woolworths Group.” Woolworths Group, 10 Apr. 2019, woolworthsgroup.com.au/page/media/Latest_News/woolworths-group-first-globally-to-issue-certified-green-bonds-for-a-supermarket. “Investor Appetite.” Climate Bonds Initiative, 23 Feb. 2018, www.climatebonds.net/market/investor-appetite.
4. Source: Climate Bonds Initiative (https://www.climatebonds.net/).
5. Source: Climate Bonds Initiative (https://www.climatebonds.net/).
6. “Explaining Green Bonds.” Climate Bonds Initiative, 19 Feb. 2019, climatebonds.net/market/explaining-green-bonds.
7. Jenn-Hui Tan, “Outrunning a crisis: Sustainability and market outperformance” Fidelity International, 16 Apr. 2020, https://www.fidelityinternational.com/editorial/article/outrunning-a-crisis-sustainability-and-market-outperformance-2ce135-en5/.