European Short-Term Bond Funds Increasingly Consider ESG

Published: February 11, 2022

London: A recent Fitch Ratings study found that, at end-2021, over a third of European short-term bond funds (STBFs) considered environmental or social aspects, among other characteristics, when making investment decisions. Such funds are classified under Article 8 of the EU Sustainable Finance Disclosure Regulation (SFDR). Fitch defines STBFs as fixed-income funds with a target duration of one to three years.

Fitch observed varied ESG approaches amongst the Article 8 funds surveyed, however. Funds that assess sustainability risk as a consideration in their investment decisions were equally classified with those that assess sustainability risk, but also explicitly target their exposure to companies with the best sustainability practices.

Fitch rates nine funds within the sample, only one of which is classified under Article 8 of the SFDR. STBFs rated by Fitch maintain a higher credit quality than the industry average, although credit quality for these funds remains weaker than for money market funds (MMFs).

Fitch estimates that European STBFs grew by 16% in 2021. Low or negative rates, combined with higher inflation, have historically led traditional MMF investors to consider STBFs as part of cash-segmentation strategies, supporting growth in STBF AUM. Rate rises, however, may lead to increased MMF yields, which may reverse investor allocations to STBFs.

More detail can be found in Fitch’s new dashboard, European Short-Term Bond Fund Dashboard: January 2022