A large and influential portion of the investment industry has committed to measure and manage portfolio carbon emissions, and ultimately aims to eliminate them.
In this article, we describe how we worked with the U.K.’s Brunel Pension Partnership to put a multisector high yield credit portfolio on the glidepath to net-zero emissions by 2050. From defining and setting interim targets from day one, to the critical role of bondholder engagement, we look at the first steps and the longer-term requirements of net-zero credit investing.
Executive Summary
- Investors are focusing on how to manage climate-related portfolio impacts, with many asking what it takes to embark on a journey toward “net-zero portfolios.”
- We describe work we have done with the U.K.’s Brunel Pension Partnership to set its multi-asset credit portfolio onto a feasible glidepath to net-zero emissions by 2050, with a target of at least 50% of the reduction coming by 2030.
- Setting the Parameters: Ultimate and Interim Targets
– We describe the five metrics we are measuring to assess the portfolio’s current climate-related positioning and monitor progress toward the net-zero target.
– We set out interim targets for those five metrics. - Optimizing Emissions-Reduction and Yield
– Top-down and bottom-up approaches to security selection are combined with portfolio optimization aimed at achieving the desired emissions reduction while maintaining the desired duration and yield characteristics. - Progress Through Engagement
– Once the initial portfolio is in place, progress depends much more upon urging portfolio companies to make substantial emissions reductions.
– We describe our approach to engagement and offer some key examples of successful engagement programs during 2019 – 21.
Mapping the Path to Net-Zero: Five Metrics and Four Interim Targets
Source: Neuberger Berman, Trucost. Direct + First Tier Included. Carbon emission is apportioned to the portfolio based on total assets for the banking sector and enterprise value for all other sectors. Carbon intensities are calculated for the corporate holdings only of the portfolio. Bank Loans, CLOs and sovereign debts are not included. 70% of the corporate holdings are covered by Trucost. For illustrative purposes only. This material is intended as a broad overview of the Portfolio Managers’ style, philosophy and process and is subject to change without notice. Investing entails risks, including possible loss of principal.
*Any remaining emissions addressed with verifiable carbon allowances.
