State Street Global Advisors has launched its first US-listed fixed income ETF that incorporates an assessment of environmental, social and governance factors.

Noel Archard, global head of SPDR product at SSGA.

Listed on NYSE Arca, the SPDR Bloomberg SASB Corporate Bond ESG Select ETF (RBND US) has been created to meet the growing demand for ESG-considered core bond exposure.

The fund has been seeded with $25m and comes with an expense ratio of 0.12%.

The US roll-out follows the European launch of a UCITS-compliant version of the same strategy, the SPDR Bloomberg SASB US Corporate ESG UCITS ETF (SPPU GY), on Deutsche Börse’s Xetra platform late last month.

ESG demand

According to SSGA, one of the durable ETF industry trends over the past decade has been that investors want more choice; however, when it comes to ESG investing, equity ETFs have dominated the market, while the availability of ESG fixed income solutions has been limited.

“Investors’ increasing appetite for cost-effective ESG solutions is not exclusive to the equity allocations in their portfolios,” said Noel Archard, global head of SPDR product at SSGA. “With the launch of RBND, SPDR’s first fixed income ESG ETF publicly offered in the US, investors will now be able to better align their core fixed income exposures with their investment goals.”

The fund tracks the Bloomberg SASB US Corporate ESG Ex-Controversies Select Index, an index developed by Bloomberg in collaboration with the Sustainability Accounting Standards Board (SASB) and SSGA. The index utilizes SSGA’s proprietary in-house ‘Responsibility’ or ‘R-Factor’ score.

Index design

The index is designed to reflect the performance of investment-grade corporate bonds that display favourable ESG characteristics while also exhibiting a risk-and-return profile that is comparable to equivalent conventional exposures, as represented by the Bloomberg Barclays US Corporate Index. The constituents of this regular index constitute the starting universe for the ESG-adjusted index.

To be eligible for this parent universe, a bond must be publicly issued, rated investment grade, fixed-rate, taxable, denominated in US dollars and issued by an industrial, utility, or financial corporate entity. Bonds must also have a remaining maturity greater than or equal to one year and at least $300 million of par amount outstanding.

The construct the ESG index, the universe is first screened to remove issuers involved in, or which derive significant revenue from, certain unfavourable practices, industries or product lines, including controversial weapons, civilian firearms, thermal coal extraction and tobacco.

The remaining securities are then screened to remove all companies without an SSGA R-Factor score. The R-Factor score measures the performance of a company’s business operations and governance as related to financially material ESG challenges facing the issuer’s industry. The score incorporates an ESG component and a corporate governance component and draws on a number of data sources.

The ESG component is based on the framework published by the SASB, which attempts to identify ESG issues that are financially material to an issuer based on its industry classification. The corporate governance component is generated using region-specific corporate governance codes developed by investors or regulators that describe minimum corporate governance expectations of a particular region. The governance codes typically address topics such as shareholder rights, board independence and executive compensation.

All remaining constituents are considered the investable universe for the ESG index.

The final portfolio of securities is determined utilizing an optimizer that deploys a quantitative process to select constituents and their weights to maximize the index’s overall R-Factor score while minimizing active total risk versus the Bloomberg Barclays US Corporate Index.

Peers

The fund is likely to compete with the iShares ESG Aware USD Corporate Bond ETF (SUSC US) from BlackRock and the Vanguard ESG US Corporate Bond ETF (VCEB US), both of which are derived from the same Bloomberg Barclays US Corporate Index universe.

SUSC was launched in July 2017 and has accumulated some $636m in assets. It has an expense ratio of 0.18% and is linked to the Bloomberg Barclays MSCI US Corporate ESG Focus Index.

VCEB was launched in September this year and has so far gathered $37m in assets. It has an expense ratio of 0.12% – matching that of the SSGA fund – and is linked to Bloomberg Barclays MSCI US Corporate SRI Select Index.