Furthermore, issuers in higher emitting sectors must strive for lower greenhouse gas emissions as governments push businesses to become greener as they commit to becoming carbon neutral by 2050. However, we recognise that the higher a company’s emissions, there is a greater need to transition to lower carbon activities, but this elevates the risks. This requires an active approach, rigorous analysis and a highly structured framework of engagement.
However, as higher emitting companies transition to net zero emission, this also leads to opportunities. Companies that can lower carbon emissions will extract efficiencies and become more competitive and a growing number of issuers are now making commitments to carbon neutrality.
Our hybrid approach
We take a slightly different stance to other hybrid strategies by having the flexibility to invest in fossil fuels and allocating to high yield. However, all transition bond issuers that we select must demonstrate leadership in lowering their carbon emissions.
Excluding fossil fuels does not address current carbon emissions across other high carbon emitting sectors. Over the next decade of energy transition, as we see a gradual shift away from fossil fuels to renewables, think the oil and gas majors can contribute significantly to the reduction of carbon emissions, through initiatives such as supporting the growth of deep decarbonisation technologies, such as carbon capture, storage and hydrogen, one pathway for decarbonising petroleum.
We recognise, however, that the oil and gas majors are all on different paths to lowering their carbon footprint and some are farther ahead than others. For example, in May 2020, European super-major Total adopted a new climate ambition to get to net zero by 2050.
Finally, having the flexibility to access high yield means we can maximise the longer-term return profile of a hybrid climate bond strategy, and tap into a broader range of issuers that are committed to net-zero. The arrival of former investment grade issuers into the high yield universe as a result of the pandemic also provides us with access to what we believe are still good quality companies, which do not need to refinance their debt, and which are committed to reducing their carbon emissions.
End-to-end
Once we select a green bond or transition bond, our work is only just starting. We have a structured framework in place for engagement and in collecting metrics. For transition bonds, our goal on engagement is to assess if they are on–track to meet net-zero emissions by 2050. We also validate how green bonds are creating impact through separate analysis from third party providers such as Sustainalytics. In short, we believe that robust engagement required, ensuring that green bond and transition bond issuers remain on the right path.
All-inclusive
In summary, this all-inclusive approach focuses on climate mitigation through green bonds and avoids restricting our ability to support traditional issuers that we believe can drive meaningful action to reduce carbon emissions in line with the Paris Agreement. After all, reducing carbon emissions globally is crucial to managing climate change and we believe that engaging with issuers to achieve this is a key responsibility of investors like us.
[3] Securities Industry and Financial Markets Association, 2021
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