The situation
During 2021, we undertook a thorough analysis on the impact of climate change on our corporate bond portfolio. We set out to identify the sectors most at risk of negative credit migration due to climate change. Our credit analysts subsequently conducted an in-depth bottom-up analysis of the issuers in each of those ‘at risk’ sectors, categorising the issuers as leaders, followers and laggards with respect to their climate strategy. This analytical exercise helps us to articulate the risks of investment within these sectors more clearly to our fund management team, which leads to better informed investment decision making.
How we approached the issue
Our view is that as long-term investors we’re well placed to support companies as they tackle the impacts of climate change, which includes issuers in ‘non-green’ sectors such as mining and minerals or chemicals. These sectors will contribute to the solutions required for delivering a more effective transition for society, such as copper for electrification. By tiering companies in this manner, we hoped to be able to identify which were best positioned to meet the challenges associated with climate change in these sensitive sectors and, which issuers were at risk of a deterioration in their credit profile resulting from climate change. We believe that companies that are already implementing greenhouse gas emission reduction targets with strong business and financial profiles are better positioned to adapt their businesses, without suffering significant credit downgrades. As a responsible investor, we want to support the leaders in those sectors, or the fast followers that are trying to deliver on their ambitions. To do this, we need to select the companies we consider to be leaders from a position of expertise, making every decision matter so that we can deliver the best possible customer outcome, by directing capital to the more sustainable issuers.
The outcome
We integrated the information gathered into our wider research and this helped us gain a better understanding of both climate risks generally and how our portfolio is positioned as a result.