Introducing Robeco’s Climate Euro Government Bond ETF

Most sustainable euro government bond products either focus narrowly on green bonds or apply ESG filters that can distort risk and return. This ETF bridges that gap. With a substantial initial investment from its launch client, the strategy begins with meaningful scale, providing a strong foundation for efficient portfolio management.

The Climate Euro Government Bond ETF aims to deliver returns in line with traditional bond benchmarks. While it is tilted toward countries with better climate scores and green bonds, it seeks to maintain a risk/return profile similar to that of a market-value weighted index. Therefore, the strategy helps to fund the climate transition while fulfilling the role of conventional government bonds in a portfolio.

Most climate-related investment products are equity or credit focused, targeting companies directly involved in the transition. Yet governments play an important role in the climate transition by setting policies, issuing permits and creating incentives that can steer the behavior of companies and households. Investors can also contribute by aligning their government bond holdings to mobilize capital for the transition. Importantly, this should not come at the expense of the role these bonds play in portfolios: offering liquidity, stability and diversification from riskier assets. Robeco’s new active ETF addresses both needs by focusing on greener countries and on green bonds, while maintaining the desired characteristics of a traditional government bond portfolio.

The aim of the ETF is not to simply target low-emission countries. Instead, it aims to support the climate transition by investing in countries that are taking ambitious, credible and effective measures to reduce their emissions. By investing in green bonds, the ETF directly helps fund projects that contribute to emission reduction, such as renewable energy production and electrification of transport systems.

To evaluate countries’ climate transition performance, we use a wide range of indicators from the ASCOR dataset. These are grouped into three key pillars:

• Ambition: Are the country’s emission reduction targets aligned with science-based pathways?

• Policy: Has the country implemented credible policies and allocated sufficient budgetary resources to achieve these targets?

• Evidence: Are the country’s actual emissions declining in line with its stated pathway?
  

While targets and plans are crucial today, actual outcomes will become increasingly important as we near 2050. That’s why the relative weight of these pillars will evolve over time, with greater emphasis placed on real-world results. Below, we show how eurozone countries score overall, as well as across each of these three areas.

The ETF uses the FTSE Climate Collective Transition EMU Broad Government Bond Index as a reference, specifically for the green aspects of the portfolio. This index builds on the traditional market-value weighted FTSE EMU Broad Government Bond Index, but adjusts the country weights based on climate performance.

First, it doubles the weight of green bonds issued by eurozone governments. Then, it reassigns the remaining weight based on climate scores, giving a higher weight to countries with stronger climate credentials and reducing exposure to those lagging. Limits are applied to ensure the index remains diversified and liquid. The ETF will be at least as green as the green index: it allocates at least twice the weight to green bonds compared to the regular index, while maintaining a climate score that is at least as good as that of the green index. This creates a credible yet practical vehicle to support the transition.

While the green index offers an investable green portfolio, its risk profile and therefore its returns may differ from that of the regular, market-value weighted index. Take, for example, the case of Austria, a climate leader within the eurozone. The green index assigns a significantly higher weight to all Austrian bonds than the regular bond index.

However, Austria also issues the longest-dated bonds in the eurozone, including 50-, 70-, and even 100-year maturities – far longer than than the 30- or 50-year limits typical in most countries. Therefore, increasing the weight of all Austrian bonds means increasing the weight of ultra-long bonds. This makes the portfolio more sensitive to changes in yield and more vulnerable when yield curves steepen. In our portfolio construction, we can avoid this. Instead of adjusting weights on a country level, we allocate on a bond-by-bond basis. Meaning we can increase exposure to Austrian bonds with regular maturities, avoiding concentration in ultra-long duration bonds and maintaining a more stable risk profile.

Investors don’t have to choose between a standard portfolio with regular risk/return and a green portfolio with very different characteristics. Our portfolio construction algorithm is designed to build portfolios that are as green as the green index, while closely matching the risk/return characteristics of the FTSE EMU Broad Government Bond Index (regular index). By targeting climate-leading countries and green bonds while managing exposures bond by bond, we can build green portfolios that closely mirror the risk/return characteristics of traditional benchmarks.

Duration and maturity are not the only sources of risk. Yield differences and credit ratings also play a role. Our proprietary portfolio construction algorithm combines multiple risk characteristics to find the green portfolio that is best suited to generate regular returns. Figure 2 shows that, based on simulated returns, the ETF’s performance stays much closer to the regular index than the green index does. Importantly, this regular risk/return profile is achieved with a green portfolio.

Figure 3 illustrates the portfolio’s climate profile by comparing the weightings of bonds from countries with top, middle, and bottom climate scores. Like the green index, the ETF allocates significantly to top- and middle-ranked countries and less to bottom-ranked ones. In contrast, nearly half of the regular index is made up of bonds from bottom-ranked countries.