3 Promising ESG Bond Funds

By leveraging their extensive knowledge of management teams and investment processes, Morningstar analysts uncover under-the-radar strategies and provide advance notice of some promising funds. These three bond funds with a sustainable investing focus were recent Morningstar Prospects that have graduated to full coverage, earning Morningstar Analyst Ratings of Gold or Silver.

Pimco Enhanced Short Maturity Active ESG ETF EMNT

Pimco Enhanced Short Maturity Active ESG ETF benefits from the same high-caliber team and resources as its non-ESG sibling Pimco Enhanced Short Maturity Active ETF MINT. It applies a similarly strong process focused on capital preservation while using the firm's sustainable investing framework. Compared with Pimco Low Duration PTLDX, it carries less interest-rate risk and is run slightly more conservatively than Pimco Short-Term PTSHX when it comes to derivatives and credit risk. Those traits, combined with an attractive price tag, support its Analyst Rating of Gold.

This ultrashort bond strategy should appeal to investors looking for a low-risk offering that supports favorable environmental, social, and governance outcomes. It applies an extra layer of scrutiny in its bottom-up security selection to emphasize issuers with improving to exemplary ESG practices and to avoid those with deteriorating to harmful ESG traits. There are no set allocation targets, but this approach is most evident in the portfolio's corporate-bond allocation, which tends to skew higher-quality compared with its non-ESG siblings.

Otherwise, the strategy shares a lot in common with MINT. Both benefit from the experience and skill of Pimco's short-term desk, which is led by Jerome Schneider and includes this strategy's lead manager Nate Chiaverini. Global credit specialist Jelle Brons, who focuses on ESG implementation, is an added resource here. This portfolio is similarly focused on maintaining liquidity and providing downside protection, and it generally expresses the same themes.

iShares ESG U.S. Aggregate Bond ETF EAGG

IShares ESG U.S. Aggregate Bond ETF offers broad market-value-weighted exposure to the U.S. investment-grade taxable-bond market with a subtle tilt toward corporate issuers with strong ESG characteristics. The strategy earns an Analyst Rating of Silver.

This index strategy seeks issuers with strong ESG characteristics relative to their sector peers, but it also aims to keep tracking error low relative to the Bloomberg Barclays U.S. Aggregate Bond Index. The fund invests in U.S. Treasuries and investment-grade securitized, corporate, and government-related bonds issued in U.S. dollars. It relies on MSCI's ESG ratings, which are based on an assessment of how exposed each issuer is to ESG risks and opportunities that could be relevant to their long-term financial performance. Those ratings also signal how well an issuer is managing those risks relative to its sector peers. To be eligible for the portfolio, the corporation or sovereign entity must receive an ESG score of average or higher. Issuers engaged in certain business lines (including tobacco, firearms, gambling, and alcohol) are excluded.

Pimco Total Return ESG PTSAX

Pimco Total Return ESG offers the same strong management team and battle-tested process of its conventional sibling Pimco Total Return PTTRX, only with an ESG emphasis. That's why it earns a Gold rating for it cheapest share classes.

This strategy should appeal to investors who want a core-plus bond fund that also supports favorable ESG outcomes. This strategy has long applied certain exclusionary screens to its portfolio construction, but Pimco formally launched its ESG investment platform in January 2017. There are no allocation targets, but the strategy emphasizes issuers with improving to exemplary ESG practices while avoiding those with the opposite characteristics. Pimco has developed customized ESG scoring for different market sectors, but the approach is most evident in the portfolio’s corporate allocation, which skews higher-quality compared with the firm's standard portfolios.

Otherwise, the strategy shares a lot in common with its non-ESG sibling. Both benefit from the experience and skills of Scott Mather, who also leads the firm's ESG portfolio integration effort, Mark Kiesel, and Mohit Mittal, who replaced the recently retired Mihir Worah. Similar to EMNT, global credit specialist Jelle Brons focuses on ESG implementation.