- Expanding Coverage: FTSE Russell’s new indices now include high-yield and emerging market bonds, broadening their climate-aligned investment tools.
- Sector Adjustments: The new indices significantly underweight energy sectors while overweighting services and manufacturing, reflecting sustainability priorities.
- Performance Implications: Higher volatility and tracking differences are observed in sustainable high-yield and emerging market indices due to their unique sector compositions.
FTSE Russell Broadens Climate-Focused Bond Indices
FTSE Russell has expanded its Fixed Income EU Climate Benchmark index series to include high-yield securities and emerging markets, aligning these with the 2015 Paris Climate Agreement. Launched in June 2024, the phase 2 indices introduce a broader array of bonds to cater to the growing demand for climate-aligned fixed income investments.
Sector Rebalancing for Sustainability
These new indices, including the FTSE World High-Yield PAB Bond Index (WHYM PAB) and FTSE Asian Broad CTB Corporate Bond Index (ABBI CTB Corp), are designed to reflect the sustainable investment (SI) performance of issuers. The indices apply a “target exposure” framework to adjust the weights of bonds based on their carbon footprints and adherence to environmental standards.
As a result, traditional heavyweights like energy and banks are significantly underweighted due to their higher carbon emissions and lack of comprehensive carbon data. “Banks are underweighted due to their limited carbon emission scope 3 data, leading to lower scores under our index criteria,” explained the FTSE Russell representative.
In contrast, sectors like manufacturing and services are over-weighted, reflecting their greater alignment with green revenue and sustainable practices.
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Performance Variances in New Indices
The expanded coverage of high-yield and emerging market bonds introduces greater volatility and tracking differences compared to their base indices. This is largely due to the nature of these markets and the exclusions applied to align with sustainability criteria. For instance, in 2022, the CTB ABBI Corp index underperformed its base index by 2.47%, driven by its overexposure to the underperforming services sector.
By extending their climate-aligned bond indices, FTSE Russell is offering investors new tools to incorporate sustainability into their fixed income strategies, recognizing the diverse behaviors and characteristics of different bond markets.