Looking to diversify your portfolio? Potentially reduce your risk?

Fixed income ETFs have long been used by investors to achieve a more diversified and potentially lower risk portfolio.

And with the rise of responsible investing, more sustainable and ESG fixed income offerings become available to investors. That means you now have access to a convenient and cost-effective way to access the fixed income market whilst staying aligned to your values.

Keep reading to learn more about investing in fixed income ETFs and how they fit in with the future of responsible investing.

What do we mean by fixed income?

Fixed income securities are investment products that provide a regular, fixed payment to the investor in exchange for the use of their money for a set period of time. They are called "fixed income" because the investor receives a fixed amount of income, typically in the form of interest payments at regular intervals. 

The most common types of fixed income securities are bonds, which are issued by corporations and governments to raise capital. When an investor buys a bond, they are essentially lending money in exchange for the promise of regular interest payments and the return of the principal amount at the end of the bond's term. 

Example of fixed income investment

An example of receiving interest payments through investment in bonds would be if an individual invests $10,000 in a corporate bond with a 5% coupon rate that matures in 10 years. 

In this scenario, the individual would receive $500 in interest payments annually ($10,000 x 5%). This interest payment would be made to the investor on a regular basis, and would be paid until the bond’s term ends and the principal amount is returned to the investor.

The specific terms and conditions of each bond will vary, so it is important to carefully review the bond's offering documents before making an investment.

Fixed Income ETFs for Responsible Investors

An increasing number of investors are looking to align their fixed income investments with internationally recognised sustainability goals, such as The Paris Agreement and UN Sustainable Development Goals. 

But how do you know which fixed income investments offer sustainable or responsible investment options?

The descriptions surrounding responsible investments can often be confusing, with no single unifying framework for how fixed income securities should be categorised. 

That being said, a number of organisations such as the Climate Bonds Initiative (CBI) and International Capital Market Association (ICMA) have developed frameworks and principles to help investors identify fixed income investments that align with environmental, social and governance (ESG) values. 

Read on to see what types of responsible fixed income bonds these organisations have defined.

6 Types of Responsible Fixed Income Investments*

Here are 6 fixed income bond types for responsible investors:

1. Green Bonds

Green Bonds are debt instruments that are issued to finance environmentally beneficial projects such as renewable energy, energy efficiency, and sustainable waste management.

Examples of projects financed by green bond issuance include: renewable energy, clean transportation and climate change adoption.

2. Social Bonds

Social Bonds are debt instruments that are issued to finance projects that have positive social impacts, such as affordable housing, education, and healthcare.

Examples of projects financed by social bond issuance include: food security and sustainable food systems, socioeconomic advancement and affordable housing.

3. Sustainability Bonds

Sustainability Bonds are debt instruments that are issued to finance projects and activities with a positive environmental and/or social impact, and which may include green and/or social bonds.

4. Sustainability-linked Bonds

Sustainability-linked Bonds are a type of fixed income investment where the coupon or yield on the investment is linked, through an agreement, to the issuer’’s achievement of a climate or broader SDG goal.

An example is the sustainability-linked bond issued by electricity producer Enel in 2019. The coupon paid to investors in the bond was linked to the company’s target of achieving 55% of its electric generation capacity from renewable sources by 2021. Failure to meet this target would have resulted in an increase in the coupon paid to bondholders.

5. Climate transition or Paris-Aligned Bonds

ICMA defines Climate Transition Bonds as debt instruments that are issued to finance projects and activities that support the transition to a low-carbon, climate-resilient economy. 

For example, climate Transition Bonds aim to finance projects that contribute to the reduction of greenhouse gas emissions, the development of clean energy sources, and the adaptation to the impacts of climate change.

6. ESG Bonds

ESG bonds are debt securities that take into account environmental, social, and governance considerations in their investment processes. ESG bonds are designed to support organisations and projects that have a positive impact on the environment and society, and that adhere to good governance practices.

How each ESG rating firm defines and creates ESG scores can differ, which is why it's important to identify the ESG scoring methodology before making an investment. 

Advantages of Responsible Fixed Income ETFs

There are 3 main potential advantages to investing in responsible fixed income ETFs.

1. Diversification

Investing in green, social, sustainability and/or ESG  fixed income ETFs can provide you with a diversified portfolio of fixed income securities, which can help to reduce the risk of investing in a single bond or issuer.

This diversification can help to mitigate the impact of market volatility and improve the stability of the investment portfolio over time.‍

2. Target specific green, social and/or sustainable outcomes

Responsibly-focused fixed income ETFs can allow investors to align their investments with their environmental, social, and governance (ESG) values by providing access to a diversified portfolio of bonds issued by companies and organisations that have a more positive impact on the environment and society.

This can allow you to target specific sustainability outcomes and make a positive difference with your investments.

3. Focus on income

Fixed income ETFs allow you to earn a fixed yield over the course of your investment period, assuming that there are no defaults. This is as opposed to focusing on capital appreciation, an increase in the price or value of a fund.

GOODFOLIO fixed income ETFs 

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GOODFOLIO is a sustainable investing platform that enables you to invest in responsible fixed income ETFs, whilst keeping track of your financial returns as well as your impact on the world.

We also offer funds in a range of themes; climate, biotechnology, water, smart cities and many more.

Here’s what you can expect:

1. Fast sign up - typically onboard in less than 10 minutes‍

2. Screened and categorised ETFs - All funds are screened to meet our transparency and sustainability information standards

3. Impact reporting - up to date reports including UN SDG revenue alignment

4. Cutting edge tools -  ETF comparison tools based on impact, risk and returns

5. Sustainable ISA - create a new ISA or transfer your existing one with our help

6. Great customer support - we are always here to help!

Join the future of investing and start your free GOODFOLIO account today!

As with all investing, your capital is at risk.

* Sources: https://www.icmagroup.org/sustainable-finance/the-principles-guidelines-and-handbooks/
‍https://www.unpri.org/fixed-income/esg-engagement-for-fixed-income-investors/2922.article