ESG High-Yield Bonds Have Not Outperformed

ESG proponents claim that “green” high-yield bond returns offer better risk-adjusted returns. New research disproves this claim, although environmental, social and governance (ESG) investors do not incur a penalty by owning green bonds.

On June 17, 2020, in response to growing demand for fixed-income benchmarks that consider ESG criteria, ICE Data Indices introduced several series of corporate and government bond indexes. All three US high yield (HY) ESG indexes exclude bonds of companies with Sustainalytics scores of 20 or more for “controversial weapons – most significant involvement,” and one of the three also excludes bonds of companies with scores of 30 or more for overall ESG risk. In introducing the ESG indexes, ICE Data Indices retroactively provided daily descriptive statistics, including returns, from December 31, 2016, forward.

The three US high-yield ESG indexes are subsets of the ICE BofA US High Yield Index:

ICE US High Yield ESG Tilt Index (Bloomberg ticker: H0SG)

Excludes bonds of companies with significant involvement in controversial weapons and tilts the weights of remaining issues in favor of those with better (lower) ESG risk scores.

ICE US High Yield Duration-Matched ESG Tilt Index (Bloomberg ticker: H0SD)

Follows the methodology of the ESG Tilt Index but further adjusts the issue weights to match as closely as possible the ICE BofA US High Yield Index’s interest rate exposure across rating categories and industry sectors.