Case study: delivering climate-aware credit investing for pension scheme clients
- 15 September 2021 (5 min read)
As a crucial climate summit approaches at COP26 in Glasgow this November, UK pension schemes find themselves well positioned to act on climate change risks. In general, investment strategies have been resilient through the pandemic, and schemes, by and large, are likely in a better funding position. The significant stimulus that has underpinned asset prices has been accompanied by a gentle uptick in yield that has been beneficial from a liabilities’ perspective
As pension schemes mature and move towards a fully funded position, and perhaps embark on cashflow-driven investment (CDI) strategies, thoughts must turn to de-risking and to endgame objectives. As this happens, climate change has steadily emerged as one of the central themes for any investor on this pathway. Simply put, in any CDI strategy a lot of the focus is necessarily on successfully managing downside risk in the assets held – and that now clearly includes both the physical risks of climate change and the risks inherent in the transition to a net zero world.
The findings we set out below indicate that institutional investors can be confident this is within their grasp. We believe we have demonstrated it is possible to reduce the measurable climate risk in a credit portfolio while maintaining or even improving other key characteristics such as credit spreads. Importantly, we also consider just how long the window of opportunity to perform this adjustment might remain open.
Framing the discussion
Clients have been asking us how we can integrate climate into their mandates, and we have broken down our approach into a three-step process known as
AIM: Assess, Integrate and Monitor.
Assess
Investors today have greater access to the data, tools and approaches required to assess and manage climate-related risks. In addition, greater disclosure around climate is becoming a regulatory reality for UK pension schemes with the Task Force on Climate-related Financial Disclosures (TCFD) becoming mandatory in October 2021 for large schemes. That means clients have push and pull factors driving them to better understand the climate risk factors at play in their existing portfolios, and to start setting tangible objectives over time. This might include a series of targets designed to align with the Paris Agreement goal of net zero by 2050 or before.
Integrate
The next stage is to understand what changes can be made to a portfolio to help meet those objectives, whether in the assets held or in how they are managed. This may prompt the inclusion of green bonds in a portfolio and deeper analysis of holdings in high-emitting industries to examine their carbon pathway. An investor could also use metrics such as climate value at risk (CVaR) to build a long-term picture of a portfolio’s risks in different scenarios with the goal of reducing CVaR as we approach 2050. Long-term credit strategies in particular can be closely aligned with the timeframe over which climate risks are likely to materialise.
Monitor
This is not a one-off task. Our understanding of these risks and how issuers are addressing them is changing all the time. It is therefore essential to regularly review portfolio positioning through this climate lens. Pension schemes should expect their climate profile to consistently improve as more companies make more ambitious commitments and as portfolio managers re-invest in bonds consistent with a client’s requirements.
Not for Retail distribution
This document is intended exclusively for Professional, Institutional, Qualified or Wholesale Clients / Investors only, as defined by applicable local laws and regulation. Circulation must be restricted accordingly.
This promotional communication does not constitute on the part of AXA Investment Managers a solicitation or investment, legal or tax advice. This material does not contain sufficient information to support an investment decision.
Due to its simplification, this document is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this document is provided based on our state of knowledge at the time of creation of this document. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision. Before making an investment, investors should read the relevant Prospectus and the Key Investor Information Document / scheme documents, which provide full product details including investment charges and risks. The information contained herein is not a substitute for those documents or for professional external advice. The products or strategies discussed in this document may not be registered nor available in your jurisdiction. Please check the countries of registration with the asset manager, or on the web site https://www.axa-im.com/en/registration-map, where a fund registration map is available. In particular units of the funds may not be offered, sold or delivered to U.S. Persons within the meaning of Regulation S of the U.S. Securities Act of 1933. The tax treatment relating to the holding, acquisition or disposal of shares or units in the fund depends on each investor’s tax status or treatment and may be subject to change. Any potential investor is strongly encouraged to seek advice from its own tax advisors.
Information concerning portfolio holdings and sector allocation is subject to change and, unless otherwise noted herein, is representative of the target portfolio for the investment strategy described herein and does not reflect an actual account . The performance information shown herein reflects the performance of a composite of accounts that does not necessarily reflect the performance that any particular account investing in the same or similar securities may have had during the period. Actual portfolios may differ as a result of client-imposed investment restrictions, the timing of client investments and market, economic and individual company considerations. The holdings shown herein should not be considered a recommendation or solicitation to buy or sell any particular security, do not represent all of the securities purchased, sold or recommended for any particular advisory client, and in the aggregate may represent only a small percentage of an account’s portfolio holdings.
Representative Accounts have been selected based on objective, non-performance based criteria, including, but not limited to the size and the overall duration of the management of the account, the type of investment strategies and the asset selection procedures in place. Therefore, the results portrayed relate only to such accounts and are not indicative of the future performance of such accounts or other accounts, products and/or services described herein. In addition, these results may be similar to the applicable GIPS composite results, but they are not identical and are not being presented as such. Account performance will vary based upon the inception date of the account, restrictions on the account, along with other factors, and may not equal the performance of the representative accounts presented herein. The performance results for representative accounts are gross of all fees and do reflect the reinvestment of dividends or other earnings.
The ESG data used in the investment process are based on ESG methodologies which rely in part on third party data, and in some cases are internally developed. They are subjective and may change over time. Despite several initiatives, the lack of harmonised definitions can make ESG criteria heterogeneous. As such, the different investment strategies that use ESG criteria and ESG reporting are difficult to compare with each other. Strategies that incorporate ESG criteria and those that incorporate sustainable development criteria may use ESG data that appear similar but which should be distinguished because their calculation method may be different.
Issued in the UK by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority in the UK. Registered in England and Wales No: 01431068. Registered Office: 22 Bishopsgate London EC2N 4BQ. In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries.
Risk Warning
The value of investments, and the income from them, can fall as well as rise and investors may not get back the amount originally invested.