HOW CAN FIXED INCOME INVESTORS SUPPORT, ACCELERATE AND BENEFIT FROM CLIMATE-LED INVESTING?

December 15, 2021

This year has been another record year for sustainable fixed income markets, with issuance reaching a total of over $780 billion during the first 9 months of 2021, of which $450bn in green bonds, according to the latest data provided by Bloomberg New Energy Finance.

The COP 26 in November and the watered-down ambitions of governments, including a compromise on phasing-down (instead of phasing-out) of fossil-fuel subsidies and coal, underscore the critical and urgent role that investors have in supporting and accelerating climate-led investments. For fixed income investors, sustainable fixed income markets already provide multiple tangible solutions to deliver an active and measurable contribution with their bond portfolios.

Support the fight to climate change by investing in projects aligned with carbon neutral scenario

When looking at the different type of sustainable bonds, green bonds are the largest market and specifically designed to finance green projects. Investors who are eager to support the Paris Agreement can focus on green bonds, combining a science-based strategy and the use-of-proceeds feature, creating a positive and measurable impact towards the 1.5-degree goal.

The International Energy Agency Net-Zero 2050 scenario is reliant on the decarbonization of electricity, industrial processes and transportation. Diving into the report, it is estimated that over $2 trillion annually are needed to be allocated towards clean electricity technologies to meet the Net-Zero scenario by 2050.

As a result, investors looking to align their fixed income portfolios can analyse the amount of use-of-proceeds that are allocated towards clean energy projects.

Noticeably, the 2020 report of the Climate Bond Initiative shows that already 40% of green bond proceeds finance green energy projects, followed by green buildings and transportation accounting for over 80% of total allocations for green bonds.

The benefit for investors is clear: contributing to generate a measurable impact by (re)financing green capital-expenditures and projects. These benefits are reflected in impact measures such as avoided carbon emissions or added renewable energy capacity, at the bond and portfolio level.

Accelerate the transition through impactful issuers

However, due to limited financial capabilities or access to sufficiently large projects not all issuers can be active and recurring issuers in the green bond market. An alternative is identifying and selecting issuers whose products, services and technologies generate a positive impact and accelerate the transition to a carbon-neutral future.

For example, participating in the new bond issue of a company that is investing in research and development of electric and battery-based locomotives, accelerating the de-carbonization of the rail industry.

Another example is investing in a bond of a company that commercializes a software to optimize transport routes to reduce fuel consumption for trucks, accelerates the transition by reducing fuel demand and the carbon footprint of its clients.

Alternatively, financing a company that has developed energy efficient technologies for commercial buildings, helping to reduce energy consumption for its clients and accelerating the adoption of sustainable products.

This complementary approach to green bonds has multiple benefits, including sector and rating diversification, active credit selection, in addition to a tangible contribution to accelerate the transition through bond selection.

Benefit from growth opportunities in companies that generate positive impact and do not sacrifice on returns

For green bond issuers, despite the small yield differential between green and vanilla bonds called “greenium”, these offer the same credit rating and upside in case of an improving credit profile. In addition, those companies that are transitioning towards a sustainable business model can benefit from lower-borrowing costs over the long-term and a reduced exposure to a changing regulatory environment, reducing downside risks. This allows investors to actively benefit from integrating climate driven investing opportunities in their fixed income portfolios, without sacrificing returns. As a result, a climate-led fixed income investing solution allows investors to benefit from positive impact and credit returns.

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