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

December 15, 2021

During the first six-months of 2022, fixed income investors have faced the worst market performance spanning the past several decades, driven by central banks exiting their accommodative monetary policies and fighting against a global surge in inflation. The challenging market conditions of higher interest rates, volatility and wider credit spreads has slowed down bond issuance during the first six months of 2022; this is also true for the sustainable debt market. In fact, sustainable debt issuance amounted to just $770bn compared to $901bn for the first six months of 2021, according to recent data published by Bloomberg New Energy Finance. However, the green bond market continues to break records, with total issuance of $310bn compared to $304bn for the first half of 2021.

With the current growing global macro-economic uncertainty, investors can take advantage of opportunities that are arising across global credit markets, thanks to higher all-in-yields, credit spreads and dispersion across credit markets. This holds especially true for the green bond market which is now close to $1trillion in face value and thanks to growing diversification across issuers, ratings and sectors.

By actively selecting bonds and issuers, investors can benefit from returns over the medium to long-term and generate a measurable impact with their bond portfolio.

Source: 1 ICE Green Bond index

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

A good starting point for investors is green bonds which are 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 generating 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, not all issuers can always tap the green bond market, due to limited financial capabilities or access to sufficiently large green projects. That is why looking outside of this market can offer a compelling opportunity to contribute to a net-zero bond portfolio. This can be done by selecting issuers whose products, services and technologies generate a measurable 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. Alternatively, investing in an issuer that offers hardware and software for the trucking industry to reduce fuel consumption and optimize transport routes. These issuers offer a measurable impact to their clients to reduce fuel consumption and their carbon footprint.

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 climate transition through a bond portfolio.

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

Bond investors can benefit over the long-term from climate driven investment approach by protecting downside credit risks of their portfolio. A key source of downside risk is due to a changing regulatory environment which can increase liabilities or costs to manage climate risks. In addition, investors can also benefit from the climate transition opportunities. As a result, a climate-led fixed income solution allows investors to benefit from a positive impact and credit opportunities, without sacrificing on returns.

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