Characteristics of ESG Fixed-Income ETFs

ESG fixed-income ETFs invest in bonds that raise money for a positive Environmental, Social, and Governance (ESG) impact. These funds invest in a variety of green bonds, sustainable development bonds, and social bonds. Investors in ESG fixed-income ETFs include major institutional investors such as pension funds, hedge funds, and insurance companies. There has been a massive growth in the number of fixed-income ETFs that invest in ESG bonds. As of April 2023, ESG fixed-income ETFs managed over $50 billion in assets. This article looks at the risk and return characteristics of ESG fixed-income ETFs and compares them to passively managed bond ETFs. Our results indicate that ESG fixed-income ETFs have underperformed investment grade and high-yield bond ETFs while outperforming treasury and international-sovereign bond ETFs. In addition, ESG fixed-income ETFs had the lowest risk, maximum drawdown, and downside deviation compared to all other categories except Treasury bond ETFs. Finally, ESG fixed-income ETFs underperformed investment grade, treasury, and international bond ETFs but outperformed high-yield bond ETF during the COVID-19 pandemic. Overall, we find that ESG fixed-income ETFs are a suitable alternative for investors who seek exposure to bonds with a positive social and environmental impact.