Opportunities that aim to reduce GHG emissions in the real economy
The Paris agreement set clear guidelines for the fight against climate change, with 197 countries agreeing to the objective of limiting global warming to well below 2°C. Despite the sharp acceleration of Net Zero commitments in recent years, all stakeholders have largely failed to deliver the efforts needed to set a new course to reduce global warming, making the goal of reaching carbon neutrality in 2050 even more challenging. We believe now it is the time for investors to start taking action and ensuring they are equipped to face the investment risks and opportunities related to the Net Zero journey. In our view, to be considered Net Zero, an investment portfolio should demonstrate a decarbonisation pathway consistent with a maximum temperature rise of 1.5°C above pre-industrial temperatures. At Amundi, we have set the initial intermediary target for 18% of AuM to have explicit Net Zero alignment by 20251.
How to invest in credit with a Net Zero approach
Our investment approach to Net Zero aims to ensure that not only do we contribute to the world’s decarbonisation, but we also support the energy transition. Indeed, our Net Zero approach intends to maximise our contribution towards reducing greenhouse gas (GHG) emissions in the real economy. To do this, we have adopted a highly selective approach that focuses on companies that have set a Net Zero trajectory, while engaging with those operating in high impact climate sub-sectors as they transition to Net Zero. Integrating our analysts’ views, we can favour corporates that not only offer solid credit fundamentals and valuations, but also the ones committed to decarbonisation.
In terms of data, the approach to Net Zero integrates Climate and ESG metrics, such as GHG emissions and intensity-reduction objectives and ESG scores. In addition, we consider Just Transition and TEE2 scores as they respectively focus on social challenges and energy transition risks. Given the timeline of the Net Zero target, we believe it is critical to also integrate forward-looking objectives like Science Based Targets (SBTi) and credible temperature trajectories. Our Net Zero Framework covers exclusions for coal and unconventional oil and gas, as well as Climate “Do No Significant Harm” criteria (Paris-aligned benchmark exclusions based on MSCI indicators). The Framework also features a constraint on limiting deviations for high climate impact sectors for Net Zero open-ended funds.
Opportunities in the Net Zero approach to credit
Integrating the Net Zero approach to our credit views presents an opportunity to invest in a filtered investment universe that fits our Net Zero criteria, while not having to compromise on performance. From our experience, we believe there is no detrimental cost associated specifically to a Net Zero approach, as the filtered investment universe for the Net Zero Framework remains broad enough to manage actively portfolios, engage with corporates and generate alpha. In addition, this filtered investment universe is expected to continue to grow in line with an increase in corporate commitments to Net Zero. As such, the market for labelled-bonds has been growing year-on-year. It stood at ~EUR 700bn in 2022 and is expected to continue to represent attractive opportunities for the Net Zero approach.
In fighting climate change, Green Bonds are a key tool that also tend to exhibit lower volatility than conventional bonds, making them an attractive proposition for many investors. Along with the Green Bonds market, the Sustainability-Linked Bonds (SLBs) market has also grown. SLBs instruments incentivise issuers’ achievement of predefined sustainability or ESG objectives through KPIs and Sustainability Performance Targets. Issuers are thereby committing explicitly in the bond documentation to future improvements in sustainability outcomes within a predefined timeline. SLBs are typically forward-looking performance-based instruments and bring diversification to the issuer base without compromising yield. These instruments are another way to finance the energy transition. Interestingly, more than 60% of SLB KPIs are linked to GHG emissions.
Finally, we believe that investors willing to embrace a Net Zero approach in credit, will benefit from attractive credit valuations in 2023, while also contributing towards reducing GHG emissions in the real economy. With a more strategic perspective, Net Zero investing in credit is also gaining attention among investors as a pillar of the CORE ESG allocation, while satellite ESG strategies tend to be built around impact investing.