What is climate-aware buy and maintain credit?
We base our strategy around three core objectives: Capital preservation, climate alignment and credit return and build our portfolios using a maturity-based approach to climate-risk, with clear objectives over short- to long-term time horizons.
Credit investors must act now to adapt to this new reality, and we have the tools to help them do it.
Why consider investing in climate-aware buy and maintain?
Institutional investors often have a long-term focus, aiming to build resilience both for today and for decades to come. That has made climate-aware investing an inescapable part of portfolio construction.
Long-term credit forms the core of buy and maintain strategies and as an asset class has a natural alignment with the time horizon over which climate-related risks can materialise. What you invest in today should deliver resilience, both by allaying those risks and fostering a successful transition to a low-carbon economy.
One of the key pillars of our approach is the inclusion of specific climate-related objectives that reflect our clients’ priorities and requirements. The goal is a tailored solution that can help protect portfolios against the risks, fulfil regulatory obligations and meet financial objectives – all while positively contributing to the climate transition.
How do we deliver a climate-aware strategy?
At the heart of our Climate-Aware Buy and Maintain approach is a three-step process to optimise portfolios for the transition: Assess, Integrate and Monitor (AIM). Our goal is to give clients the ability to AIM for net zero and align with the Paris Agreement decarbonisation pathway.
ASSESS – A surge in the volume and quality of data available around climate risks has made it possible for investors to gain effective insights into how their portfolios from a climate perspective. It has also coincided with increased regulatory scrutiny around climate-related disclosures for institutional investors1.
The outcome of a portfolio assessment might be to seek alignment with the Paris Agreement on climate change. This is often interpreted as the pursuit of net zero greenhouse gas emissions by 2050, with interim goals in place to smooth the journey. We also believe investors should look to the carbon pathway of assets, rather than simply the current footprint, to find best-in-class companies targeting decarbonisation.
INTEGRATE – There is no passive route to building climate-aware portfolios. Once the assessment is complete, security selection is crucial in building investors’ portfolios to mitigate against emerging climate risks while seeking to secure the required financial returns over time.
The vibrant green bonds market will form part of the solution. Additionally, using a best-in-class approach across all sectors can enable schemes to maintain diversification while allocating capital to market leaders to ensure a whole-of-market transition. The maturity of bonds bought is also important as some climate risks are more likely to emerge over time, reducing the appeal of climate laggards at the long end. We use scenario analysis to guide investment decision making in a variety of scenarios, backed by deep fundamental analysis from our 40-strong credit2 research team and a conviction-led, climate-focused engagement programme.
MONITOR – Climate investing is constantly evolving. Monitoring the steady flow of new commitments and data is critical if investors are to properly understand whether their climate-aware credit portfolios are achieving their financial and climate objectives.
The next decade will likely see further improvements in the quality and availability of data from issuers. This may include clearer assessments of so-called Scope 3 emissions which relate to the indirect effects of company products and services. More generally, there is significant impetus around the greater use of Science-Based Targets which will aid transparency.
- As an example, larger UK pension schemes must make disclosures around climate risks in line with the requirements of the Task Force on Climate-related Financial Disclosures (TCFD) from October 2021.
- Source: AXA IM, as at 31/12/2020
Building financial and climate resilience in a long-term credit portfolio
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Climate-aware investing at AXA IM
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