Sage ESG Intermediate Credit index eyed for investors with environment, governance, social views

By Jeff Pines

Silver Spring, Md., Sept. 29 – Fixed-income investors who are concerned with the environment, social issues and governance can now use a new index, the Sage ESG Intermediate Credit index, to benchmark their portfolios.

Austin, Texas-based Sage Advisory Services built the index to help ESG investors. It announced the index in a press release on Thursday.

“We found the ESG world is extremely top heavy with equity products,” Robert G. Smith, president and chief investment officer of Sage, told Prospect News in a telephone interview. But even so, there aren’t a lot of ESG funds out there.

For example, among Morningstar’s U.S.-domiciled mutual funds and exchange-traded funds there are 5,130 funds with $11.4 trillion of assets. Of those, 216, or 4%, of the funds are socially conscious and have $193 billion of assets, according to data provided by Sage.

In Morningstar’s fixed-income world of 1,660 funds with $3.6 trillion, there are 42 socially conscious funds with $17 billion of assets.

For fixed income investors, “We wanted to bring more depth and definition in that part of the marketplace,” Smith said.

Smith believes there isn’t much for ESG investors to use right now, and fixed income investors need well-designed benchmarks that can compete with conventional indices.

Some investors focus on climate, others on different issues, such as religion. “You have a world of ways to look at bonds, and we didn’t want a bias in terms of theme,” he said. “We wanted to be the Switzerland of the ESG world.”

Sage uses a proprietary formula to find 100 to 120 investment-grade securities with a minimum tranche size of $500 million, Sage said in a press release. The average tranche size for companies in the index is $1.4 billion.

The minimum tranche size ensures investors the index is using liquid securities, said Ryan O’Malley, fixed income portfolio strategist. “These are very tradeable companies. You’re never going to have a hard time trading them.”

Scoring for the index isn’t just about hard numbers, but a controversy factor is used, too. “We’re trying to mitigate risk,” he said, and avoid major scandals like Volkswagen’s diesel-engine software issue. A major scandal could send a company’s bonds falling. “You make sure you don’t have the big blowups. You keep volatility down.”

In the future, Smith said, Sage may develop products based on the index, or seek royalties, but for now, “The first step was to share our knowledge and insight with the world. I think because of the underdevelopment of the indices in the ESG market the time is now and we stepped in and said let’s get it done.”

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