Introduction
Assets tracking ESG-based investment strategies have been booming recently. While ESG demand has increased in recent years, there’s been additional appetite in the wake of the COVID-19 pandemic. ESG refers to three key aspects of sustainability and ethical business practices: environmental, social and governance. When measured and filtered for, ESG-based investing can provide a way for capital to flow to firms that engage in business lines and practices conducive to sustainability and high standards of ethics. Much in the way investors have long understood risk factors related to credit, interest rates and idiosyncrasies, ESG metrics seek to capture real risk factors facing investors.
With the launch of the iBoxx MSCI ESG Advanced USD Liquid Investment Grade (IG) Index (IBOXIG ESG), the U.S. IG corporate bond market has a crucial measure for the tradable ESG IG credit market. The IBOXIG ESG selects from the iBoxx USD Liquid Investment Grade Index (IBOXIG) universe, and then applies climate and values-based screens to create an index composed of the IBOXIG entities with above-average ESG scores relative to their industry peers. The ESG screens exclude flagged business lines, as well as firms where the percent of revenue is linked to flagged business practices.
The climate-based screens remove issuers from the Oil & Gas sector, issuers with industry ties to fossil fuels and issuers scoring below a defined threshold for environmental controversy. The values-based screens remove a variety of controversial business activities including adult entertainment, alcohol, civilian firearms, controversial weapons, privatized prisons, gambling, genetically modified organisms, nuclear power, nuclear weapons, palm oil, predatory lending and tobacco, as well as issuers violating the United Nations Global Compact (UNGC). The index also removes issuers with MSCI ESG ratings of BB and below and issuers below a defined threshold for overall controversy.
