ESG Bond ETFs: Passive aggressive investing?

4 minute read

It seems unreasonable that Russia's premiere thermal coal mining company's bonds are being bought by ESG bond ETFs. Our analysis indicates several potential errors leading up to this. In summary, Russian thermal coal miner SUEK bonds have been included in at least one ESG bond ETF with explicit thermal coal exclusion criteria, exposing investors to both economic loss and thermal coal mining funding.

Due to this, investors in certain emerging market ESG bond-ETFs may have reason to engage with the fund manager on the back of potential breaches of the investment strategy criteria.

We have three main concerns on behalf of ETF investors. First, some ESG metrics provided by the ESG scoring agency used by the index are misleading, as the issuer is not assigned an ESG score by the agency that is being used for index construction. Second, the index construction should capture coal even when not flagged by ESG data providers, and lastly, ETF managers should capture coal exposure even when the index includes it.

The ETF manager explicitly states that the fund should exclude thermal coal, and has relative freedom to not buy bonds included in the index. Thus, we opine that methodology is failing across ESG data provisioning, index construction and ETF construction and as a result, investors may have been misled to believe that they will not be exposed to funding thermal coal when investing in the product.