Is it brave to brand an ESG ETF launch as SFDR 9?
Three types of ESG labels for bonds could increase investor confidence in the ESG credentials.
The European Union’s Sustainable Finance Disclosure Regulation (SFDR) has become controversial. Initially, people characterized SFDR 9 as “dark green” and SFDR 8 as “light green, though this was an over-simplification since in both cases the disclosure categories are broad churches, encompassing a wide range of possible approaches. Given the different opinions on ESG, this can lead to allegations of “greenwashing”, and fund ratings firms such as Morningstar removed ESG tags from funds they deemed to be not sustainable enough. Meanwhile asset managers themselves have “downgraded” some funds from SFDR 9 to SFDR 8.
The ”light green versus dark green” descriptions also “dumb down” the debate by focusing only on the E and overlooking the S and the G in ESG. Investors have different perspectives on how to define and prioritise the three letters in ESG, which stand for Environment, Social and Governance. Funds focused purely on the environmental angle might be too narrow in focus for some investors.
The JP Morgan ETFs (Ireland) ICAV – Green Social Sustainable Bond UCITS ETF contains three categories of bonds. The oldest and largest market is “Green bonds”, and it also includes the newer markets for “Social” and “Sustainability” bonds. JP Morgan research has developed its own approach to categorizing these bonds, and 100% of the portfolio (ignoring cash and derivatives) needs to meet the EU MiFID definition of a “sustainable activity”, which is itself contentious. For instance, some investors fret about natural gas and nuclear being included in the EU “taxonomy”, while other investors argue that LED lighting should be included. Investors who want to dig deeper into the ESG side should seek out the extensive SFDR 9 “level 2” disclosures on positive and negative impact, which are being phased in this year.
This is an actively managed ETF and is fully transparent, disclosing all 169 holdings on a daily basis. It contains a mix of supranational bonds eg issued by the European Union of the African Development Bank; single sovereign bonds eg Germany; municipal bonds eg state of Baden in Germany; developed market corporate and bank bonds eg French bank Credit Agricole, US biotech Amgen and German real estate firm Vonovia and a range of emerging market corporate bonds, such as GreenKo Solar and Indian Railway in India, and ecommerce group Mercado Libre in Latin America. A small amount of exposure to bonds issued in China might be an issue for a few ESG investors.
From an investment angle, one historical concern about green bonds was the “greemium” or green premium for borrowers, who paid lower interest on green bonds than on their other bonds. JP Morgan now argue that the general sell off in bonds last year has opened up attractive opportunities. Going forward, some investors hope that increased demand for green, social and sustainability bonds could lead them to outperform regular bonds.
This is a long only benchmarked product, not an absolute return mandate. Its benchmark is Bloomberg Global Aggregate Green Social Sustainability Bond 1-10 year Index, though there is some scope to invest “off benchmark” in high yield names.
An ongoing charge of 0.32% seems reasonable for an actively managed fixed income ETF. The passive iShares USD Green Bond ETF is only slightly cheaper at 0.20%.