25 May 2021

Expert’s View: The benefits of ESG filters in corporate bond investing

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Marketing document – FOR QUALIFIED INVESTORS ONLY– This document is reserved and must be given in Switzerland exclusively to Qualified Investors as defined by the Swiss Collective Investment Scheme Act of 23 June 2006 (as amended from time to time, CISA).

The primary aim for bond investors is to mitigate downside risk while maintaining stable income streams. In our latest Expert’s View, we dig deeper into the benefits of ESG filters in a corporate bond allocation, and review the performance drivers of ESG and non-ESG corporate bond indices over various market phases.

Facts and Overview

  • Corporate default is the worst-case scenario for bond investors, but other risks such as credit rating downgrades and associated spread widening can also impact bond portfolio returns. 
  • ESG credit takes a mainstream corporate bond benchmark and applies a sustainability screen that includes extra environmental, social and governance (ESG) standards. 
  • ESG-filtered credit indices aim to build a ‘best in class’ corporate bond exposure that could help reduce the risk of major scandals or corporate mismanagement affecting bond performance.

Our key takeaways

  • ESG filter in corporate bond indices: The Bloomberg Barclays MSCI SRI Sustainable Indices exclude issuers with poor ESG ratings and companies involved in serious controversies, as these can become progressively more dangerous to corporate financial stability.
  • Performance review: Our analysis underlines the benefits of ESG filtering at sector level in a corporate credit allocation during a sell-off, while a positive bond selection effect can materialise in a market recovery.

Chart 1: ESG credit indices offer greater exposure to top ESG issuers and higher corporate ratings

the impact of esg investing in corporate bonds

Sources: Lyxor International Asset Management, Bloomberg. Data as at 30/04/2021. Past performance is not a reliable indicator of future returns.

Our ESG corporate bond ETFs at a glance

Make a simple switch into our range of SFDR 8 compliant sustainable investment-grade and high yield bond ETFs and have your say on the kinds of businesses you’re willing to fund today and the kind of world you want to live in tomorrow. Our standard ESG-screened credit ETFs are physically replicated, come with an ambitious set of exclusions and show limited deviation from their conventional parent indices. With regulations and investment policies changing, and greener investing becoming the norm, it’s no longer “why?”, it’s “why not?”. 

Please get in touch if you’d like to learn more, or visit our ESG Hub to explore Lyxor’s full range of ESG bonds. In the meantime, have a look at our ESG credit range below:

This article is for informative purposes only, and should not be taken as investment advice. Lyxor ETF does not in any way endorse or promote the companies mentioned in this article. Capital at risk. Please read our Risk Warning below.

Bloomberg Barclays index disclaimer

BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays is affiliated with Lyxor International Asset Management, and neither approves, endorses, reviews or recommends the Sub-Funds. Neither Bloomberg nor Barclays guarantees the timeliness, accurateness or completeness of any data or information relating to the Indices, and neither shall be liable in any way to Lyxor International Asset Management, investors in the Sub-Funds or other third parties in respect of the use or accuracy of the Benchmark Indices or any data included therein.

Risk Warning

Key risks of Lyxor ETFs
It is important for potential investors to evaluate the risks described below and in the fund prospectus which can be found on lyxoretf.com   

CAPITAL AT RISK: ETFs are tracking instruments: Their risk profile is similar to a direct investment in the Underlying Index. Investors’ capital is fully at risk and investors may not get back the amount originally invested. 

REPLICATION RISK: The fund objectives might not be reached due to unexpected events on the underlying markets which will impact the index calculation and the efficient fund replication. 

COUNTERPARTY RISK: With synthetic ETFs, investors are exposed to risks resulting from the use of  OTC swaps. In-line with UCITS guidelines, the exposure to a swap counterparty cannot exceed 10% of the total fund assets. Physically replicated ETFs may have counterparty risk if they use a securities lending program. 

UNDERLYING RISK: The Underlying Index of a Lyxor ETF may be complex and volatile. When investing in commodities, the Underlying Index is calculated with reference to commodity futures contracts exposing the investor to a liquidity risk linked to costs such as cost of carry and transportation. ETFs exposed to Emerging Markets carry a greater risk of potential loss than investment in Developed Markets as they are exposed to a wide range of unpredictable Emerging Market risks. 

CURRENCY RISK: ETFs may be exposed to currency risk if the ETF is denominated in a currency different to that of the Underlying Index they are tracking. This means that exchange rate fluctuations could have a negative or positive effect on returns. 

LIQUIDITY RISK: Liquidity is provided by registered market-makers on the respective stock exchange where the ETF is listed, including Societe Generale. On exchange liquidity may be limited as a result of a suspension in the underlying market represented by the Underlying Index tracked by the ETF; a failure in the systems of one of the relevant stock exchanges, Societe Generale or other market-maker systems; or an abnormal trading situation or event.

CONCENTRATION RISK: Some ETFs, e.g. thematic and Smart Beta ETFs, select stocks or bonds for their portfolio from the original benchmark index. Where selection rules are extensive it can lead to a more concentrated portfolio where risk is spread over fewer stocks than the original benchmark.

IMPORTANT INFORMATION

This document has been provided by Lyxor International Asset Management that is solely responsible for its content. 

Fund Name Sub fund name Country of domicile
Lyxor Index Fund 

Lyxor ESG USD High Yield (DR) UCITS ETF - Dist

Luxembourg
Lyxor Index Fund 

Lyxor ESG USD High Yield (DR) UCITS ETF - Monthly Hedged to EUR - Dist

Luxembourg
MULTI UNITS LUXEMBOURG

Lyxor ESG Euro Corporate Bond (DR) UCITS ETF - Acc

Luxembourg
Lyxor Index Fund

Lyxor ESG Euro High Yield (DR) UCITS ETF - Dist

Luxembourg
Lyxor Index Fund

Lyxor ESG USD Corporate Bond (DR) UCITS ETF - Dist

Luxembourg
MULTI UNITS LUXEMBOURG

Lyxor ESG Euro Corporate Bond Ex Financials (DR) UCITS ETF - Acc

Luxembourg

The funds that are listed in the chart comprised in this document (Funds) are collective investment schemes approved by the Swiss Financial Market Supervisory Authority FINMA (FINMA) as foreign collective investment schemes pursuant to article 120 of the Swiss Collective Investment Schemes Act of 23 June 2006 (as amended from time to time, CISA) for distribution in Switzerland to non-Qualified Investors as defined in the CISA.

The shares are not registered under the U.S Securities Act of 1933 and may not be directly or indirectly offered or sold in the United States (including its territories or possessions) or to or for the benefit of a U.S Person (being a “United State Person” within the meaning of Regulation S under the Securities Act of 1933 of the United States, as amended, and/or any person not included in the definition of “Non-United States Person” within the meaning of Section 4.7 (a) (1) (iv) of the rules of the U.S. Commodity Futures Trading Commission.). No U.S federal or state securities commission has reviewed or approved this document and more generally any documents with respect to or in connection with the fund. Any representation to the contrary is a criminal offence.

 Past performance is no indication of current or future performance. The performance data do not take into account of the commissions and costs incurred on the issue and redemption of units.

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Any information in this document is given only as of the date of this document and is not updated as of any date thereafter. 

This document is for information purposes only and does not constitute an offer, an invitation to make an offer, a solicitation or recommendation to invest in collective investment schemes.  This document is not a prospectus as per article 652a or 1156 of the Swiss Code of Obligations, a listing prospectus according to the listing rules of the SIX Swiss Exchange or any other trading venue as defined by the Swiss Financial Market Infrastructure Act of 19 June 2015 (as amended from time to time, FMIA), a simplified prospectus, a key investor information document or a prospectus as defined in the CISA.
An investment in collective investment schemes involves significant risks that are described in each prospectus or offering memorandum. Each potential investor should read the entire prospectus or offering memorandum and should carefully consider the risk warnings and disclosures before making an investment decision. 

Any benchmarks/indices cited in this document are provided for information purposes only.

This document is not the result of a financial analysis and therefore is not subject to the “Directive on the Independence of Financial Research” of the Swiss Bankers Association. 

This document does not contain personalized recommendations or advice and is not intended to substitute any professional advice on investments in financial products. 

The Representative and the Paying Agent of the Fund(s) in Switzerland is Société Générale, Paris, Zurich Branch, Talacker 50, 8001 Zurich. 

The prospectus or offering memorandum, the key investor information documents, the management regulation, the articles of association and/or any other constitutional documents as well as the annual and semi-annual financial reports may be obtained free of charge from the Representative in Switzerland.

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Lyxor International Asset Management (“LIAM”) or its employees may have or maintain business relationships with companies covered in its research reports. As a result, investors should be aware that LIAM and its employees may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Please see appendix at the end of this report for the analyst(s) certification(s), important disclosures and disclaimers. Alternatively, visit our global research disclosure website www.lyxoretf.com/compliance.

Conflicts of interest

This research contains the views, opinions and recommendations of Lyxor International Asset Management (“LIAM”) Cross Asset and ETF research analysts and/or strategists. To the extent that this research contains trade ideas based on macro views of economic market conditions or relative value, it may differ from the fundamental Cross Asset and ETF Research opinions and recommendations contained in Cross Asset and ETF Research sector or company research reports and from the views and opinions of other departments of LIAM and its affiliates. Lyxor Cross Asset and ETF research analysts and/or strategists routinely consult with LIAM sales and portfolio management personnel regarding market information including, but not limited to, pricing, spread levels and trading activity of ETFs tracking equity, fixed income and commodity indices. Trading desks may trade, or have traded, as principal on the basis of the research analyst(s) views and reports. Lyxor has mandatory research policies and procedures that are reasonably designed to (i) ensure that purported facts in research reports are based on reliable information and (ii) to prevent improper selective or tiered dissemination of research reports. In addition, research analysts receive compensation based, in part, on the quality and accuracy of their analysis, client feedback, competitive factors and LIAM’s total revenues including revenues from management fees and investment advisory fees and distribution fees.