The end of November saw Invesco updating its investment policies and making index methodology changes to upgrade its ESG approach across a number of corporate bond and emerging markets ETFs.
The changes include updates to reference indices and exclusion criteria and embedding ESG within the investment policy. Paul Syms, head of EMEA ETF fixed income product management at Invesco, explains that the firm is keeping up with developments in the ESG market.
“We first developed ESG fixed income indices with Bloomberg three years ago and at the time ESG for passive fixed income and SFDR was fairly new.
“Lots of issuers and clients were uncertain about implementing ESG but the regulatory standpoint has become more well defined as regulators have clarified definitions.”
At the time, ESG in fixed income was relatively new and there were gaps in coverage by ratings agencies. “We let in issuers that were not rated as a neutral position but as time has gone on we need to provide required reporting and ESG scores and we have had to exclude the non-rated issuers.”
Syms explains that this has been an opportunity to use the requirement to review the whole of the index, adding that they can then make sure that it stands the test of time.
There have been a number of ETFs announcing the recalibrations of their underlying indices, or even downgrading them for ESG.
“A lot of this has happened on the equity side with some clarifications recently and there was also a bit of uncertainty which means that from a prudent standpoint some funds have been downgraded from Article 9 to Article 8 until there is clarity,” Syms says.
“One or two funds have even been downgraded from Article 8 to 6 because they were not offering strict enough ESG criteria to be considered as an ESG product.
“Everyone is becoming more familiar and also more cautious, making sure everything is well defined. If you are marketing a product it must meet those criteria that investors and regulators would expect.”
In this, one of the most challenging years for bonds, there was a domination of government bond ETFs for the first half to three quarters of the year, in which it is much harder to find ESG products. The appetite now has moved onto investment grade credit, Syms says, where there is an opportunity to find ESG product. The figures show that some 48 per cent of dollar denominated investment grade credit flows have gone into ESG products and over a 100 per cent of flows – some EUR6 billion – on a net basis in Euros have gone into ESG investment grade flows.
“What you will see is that Europe has led in ESG development with European issuers and client bases more familiar with ESG. The US issuers are catching up but they have lagged relative to Europe.”
Syms believes this is driven by regulation enforcing ESG, with SFDR and other regulations having a major impact on European issuers and asset managers.
“The majority of enquiries we get around bonds is looking for ESG products,” Syms says. “Most investors want to make sure they are buying an ESG product .”