A bond issued for a Russian thermal coal miner made its way into an exchange-traded fund (ETF) with explicit thermal coal exclusion criteria, but was sold this week and data coverage errors leading to the inclusion have been fixed.
The bond in question is a $500m 3.375% September 2026 issue from SUEK Securities DAC, a special purpose vehicle that issues bonds to finance its parent, Siberian Coal Energy JSC.
The bond made its way into the JP Morgan ESG CEMBI Broad Diversified Custom Maturity Index, the underlying index for at least one ESG-branded bond ETF with explicit thermal coal exclusion criteria, managed by Legal & General Investment Management (LGIM).
JP Morgan declined to comment. LGIM said the bond in question was deleted from the index tracked by the ETF as of 30 March, alongside other Russian holdings from the JP Morgan indices. LGIM’s fixed income index portfolio management team was able to sell the bond on 17 May.
“The initial presence of this bond in the portfolio was due to lack of external ESG data coverage, which we understand has now been resolved,” a spokesperson for the asset manager said.
“SUEK is now covered by the relevant ESG data providers, meaning that it would have been excluded from the index and the ETF regardless of the Russian invasion.”
Sustainalytics, an ESG scoring agency used by JP Morgan, told IPE that SUEK Securities entered into its coverage universe late last year, followed a quarter later by its parent, but that that it did not initially link SUEK to the parent given the data it had available at the time on SUEK.
“Data on corporate family trees, especially in the fixed income space, is complex and dynamic, and thus we have in place an ongoing monitoring process that scans for updates to these parent-subsidiary relationships – due to mergers, spinoffs, as well as new information we receive from our third-party reference data providers,” a Sustainalytics spokesperson said.
“We identified new information on the relationship between the entities in the first half of May, and we immediately moved to link the subsidiary to the parent and update the research.”
The issuer SUEK Securities is therefore now flagged for thermal coal involvement.
The Anthropocene Fixed Income Institute (AFII), founded by Ulf Erlandsson, a former credit portfolio manager at AP4 in Sweden, flagged the inclusion of the bond in the ETF in a commentary this week.
Erlandsson said the actual economic loss may be small for the investor as the ETF’s original position in the bond was small, but that “it should however be clear that investors have been exposed to funding thermal coal through this”.
“It is our view that it is important that passive index vehicles are aligning with their stated ESG intentionality and as standards are being set on various ESG frameworks, it should be important to supervisory authorities to signal what is acceptable and not before similar events but in more sizable volumes happen,” he wrote.
Index construction and ETF managers should capture coal (exposure) even when not flagged by ESG data providers and when the index includes it, he said, claiming that obtaining the necessary information and carrying out the independent analysis would be “trivial”.
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