De-carbonization of the global economy requires a concerted effort from multiple parties, including asset owners and investment managers. Bond investors have a key role to play in this process since they provide debt capital, essential for steering the world toward the net-zero target.
We believe that fixed income portfolios can be successfully positioned for carbon transition and net-zero alignment with the application of a specific focused framework. For example, use of relevant indicators, such as Climate Value-At-Risk or carbon intensity, can benefit the portfolio construction process, helping achieve lower carbon footprint vs. market benchmark. The latter should be managed and monitored on the absolute level as well, setting a 2025 interim target and a 2050 ultimate objective for portfolio reductions in carbon intensity and absolute carbon emissions.
Climate indicators also provide important insights into fundamental bottom-up security selection decisions across the sectors, and so they are firmly incorporated into our proprietary ESG rating system. Specific exclusions can be applied to sectors like thermal coal mining, but more broadly we prefer to actively engage with issuers across the investable opportunity set. Our active engagement process prioritizes climate change issues, particularly for the companies which we believe are not net-zero-aligned. We seek appropriate climate risk disclosures from these issuers, set targets and closely monitor their progress over time. Should no sufficient action have been taken, the holding can be eventually removed from the portfolio.
Finally, incorporating climate risk considerations into the process can also help generate useful investment insights, for example, capturing transition opportunities for individual companies or adjusting return expectations for industries or sectors considering their underlying exposure to climate risks.
In summary, we believe that bond investors don’t have to choose between achieving their investment objectives and carbon transition goals. A disciplined process can help construct a fixed income portfolio, capable of delivering consistent outperformance and providing alignment with the Net Zero initiative and Paris Climate Agreement.