Adding a responsible dimension to your sovereign bond allocation
The potential of sovereign green bonds
Responsible investing in the government debt space is a need that more and more investors share. Nations can be, however, complex to assess from a sustainability perspective, making the attribution of ESG ratings exposed, sometimes, to subjective assessments of social and political orientations, that change over time. This renders the traditional ESG approach based on filters or exclusions not viable for the ESGisation of a government bond portfolio.
Fortunately, a more objective approach to responsible investing in the government bond space exists, in the form of the government green bond market. This forms part of the broader and rapidly growing green bond market which is now worth well over EUR 2 trillion1 and which, especially in Europe, offers an increasing degree of diversification.
Green bonds are debt securities where the proceeds are used to finance climate or environmental projects. By construction then, green bonds are highly transparent instruments that tie the use of capital to projects with a tangible and measurable positive impact in environmental terms.
Investing in European government green bonds, for example, provides investors with surety that they are positively contributing to the achievement of the EU 2018 Action plan on sustainable finance, that aims to help the EU achieve the net zero transition.
As exemplified by our own product development (or “ETF launches”), the growth of the government green bond market over recent years has been accompanied by innovation.
For the most fervently committed to climate action
The Lyxor Euro Government Green Bond (DR) UCITS ETF, which debuted in 2021, is designed to cater for clients seeking to combine government bond exposure with a strong commitment to climate action. Being 100% invested in green bonds issued by Eurozone governments, it has a natural geographical bias towards the largest Eurozone sovereign green bond issuers, France, Germany and Italy. And given that green bonds typically have a longer maturity than non-green bonds, it exhibits a higher duration, or level of interest rate risk2, compared to standard euro government bond indices. This makes it more suitable for investors who do not have tighter constraints around geographical or duration exposures.
Adding a responsible dimension to a traditional government bond exposure
For investors seeking innovative solutions that fuse sovereign bond investments with an ESG stance while maintaining the same risk profile, including duration and country allocation, as a standard Euro Government Bonds exposure, Amundi recently launched, in June 2023, a green bond tilted euro government bonds ETF – the Amundi Euro Government Tilted Green Bond UCITS ETF. This SFDR Article 83 ETF is designed to limit country and duration bias, while at the same time offering a 30% exposure to green bonds. It thereby provides an efficient means of adding a responsible investing dimension to a core government bond building block.
For more information about investing responsibly in the sovereign bond space please refer to our dedicated Fixed income page.
1. Source: European Commission: Sustainable Finance, March 2023
2. Source: Amundi ETF, December 2023
3. SFDR: “Sustainable Finance Disclosure Regulation” – 2019/2088/EU. EU regulation that requires, amongst other things, the classification of financial products according to their ESG intensity. A fund is referred to as “Article 8” if it promotes ESG characteristics in tandem with other financial objectives, or “Article 9” when it has a sustainable investment objective. Any fund that does not comply with the two previous categories is an “Article 6” fund.
KNOWING YOUR RISK
It is important for potential investors to evaluate the risks described below and in the fund’s Key Investor Document (“KID”) and prospectus available on our website www.amundietf.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.
UNDERLYING RISK - The underlying index of an ETF may be complex and volatile. For example, 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.
REPLICATION RISK - The fund’s 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 - Investors are exposed to risks resulting from the use of an OTC swap (over-the-counter) or securities lending with the respective counterparty(-ies). Counterparty(-ies) are credit institution(s) whose name(s) can be found on the fund’s website amundietf.com. In line with the UCITS guidelines, the exposure to the counterparty cannot exceed 10% of the total assets of the fund.
CURRENCY RISK – An ETF may be exposed to currency risk if the ETF is denominated in a currency different to that of the underlying index securities it is tracking. This means that exchange rate fluctuations could have a negative or positive effect on returns.
LIQUIDITY RISK – There is a risk associated with the markets to which the ETF is exposed. The price and the value of investments are linked to the liquidity risk of the underlying index components. Investments can go up or down. In addition, on the secondary market liquidity is provided by registered market makers on the respective stock exchange where the ETF is listed. 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, or other market-maker systems; or an abnormal trading situation or event.
VOLATILITY RISK – The ETF is exposed to changes in the volatility patterns of the underlying index relevant markets. The ETF value can change rapidly and unpredictably, and potentially move in a large magnitude, up or down.
CONCENTRATION RISK – Thematic 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.
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For Lyxor ETF:
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