Sustainable Returns - Climate transition within fixed income

12 October 2023

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Expert: Adrian Hull, Global Head of Core Fixed Income, Aegon Asset Management Moderator: Vanessa Bingle, Director, ESG & Responsible Investment, Alpha FMC


  1. Fixed Income investors have a role to play in climate transition, and this is likely to be more effective in active fixed income strategies than passive strategies
  2. As an industry, we need to focus on action towards decarbonisation, not just measurement and disclosure
  3. The industry should come together to drive the approach for and progress on climate transition, otherwise regulators will step in to define what’s required
  4. As a fund selector, it can be difficult to get real insight and confidence in how a manager is approaching climate transition and embedding it within the investment management process
  5. Mandatory disclosure of climate metrics via the FCA’s codification of the TCFD recommendations is a welcome step, but challenges in the data quality, coverage, and ability to aggregate across managers mean product-level reports are currently being used only lightly by some fund selectors


The discussion centred around how climate transition considerations can be embedded in Fixed Income portfolios, in particular the relevance in short-dated corporate Fixed Income strategies.

Fund selectors are placing increasing prominence in their selection processes in understanding how an investment manager embeds climate transition within their portfolio management process.

Challenges faced by fund managers in getting clarity on how an underlying company is identifying and managing its exposure to climate risks and opportunities, are mirrored by the challenges faced by fund selectors when it comes to getting clarity on how climate transition considerations are embedded in the portfolio management process by third party fund managers.

Measurement & disclosure vs. action:
There is wide recognition that increased disclosure of climate-related risks, opportunities and metrics by asset managers, including through regulatory developments such as the FCA’s codification of the TCFD recommendations is a positive step. However, there was agreement that measurement and disclosure alone are insufficient and as an industry, we must use the levers we have to contribute to real-world decarbonisation.

The group discussed the lack of clear answers to exactly how the global economy can and should transition towards a net zero future. The group felt that decarbonisation targets set by corporates are generally unambitious. There was discussion of the risk of the investment industry targeting portfolio decarbonisation, rather than real-world decarbonisation, and the risks to an effective transition to Net Zero this poses.

The group recognised there are many incentives to drive portfolio decarbonisation, including the increasing prominence of disclosure, and the potential for fund selectors to use or be perceived as using a lower carbon emission to give a particular fund extra marks in a selection process.

There was agreement amongst the group that reductions in a portfolio’s emissions brought about either by purchasing carbon offsets or by selling the portfolio’s most carbon intensive assets, without a proper consideration of their future, should be viewed with scepticism.

The group discussed a hypothetical case of a corporation with a carbon-intensive asset such as a gas- or coal-fired power station selling this onto an unlisted company in an Emerging Market location, potentially with weaker governance and oversight than the existing owner. While the selling company’s carbon emissions will improve, which will flow through to reduced portfolio level emissions, does this really support the transition to Net Zero? Would an alternative pathway which sees the listed corporate owning and managing the power plant to the end of its working life be preferable?

What is the behaviour that managers should be encouraging in company management through their engagement programmes? What is the behaviour that fund selectors should be expecting of third-party fund managers?

Transition readiness frameworks:
Transition readiness of the underlying companies in a Fixed Income portfolio can be a useful lens through which to assess a portfolio’s overall alignment to climate transition goals, in particular by cross-referencing this assessment vs. the portfolio’s top emitters.

The group discussed frameworks used to assess the readiness of underlying companies for a Net Zero transition. The group discussed how important it is to understand what a company is doing in practice, rather than just what they are saying, and the depth of research necessary to get confidence in these insights.

Many firms have developed proprietary climate transition assessment frameworks which are being embedded into the portfolio management process.

There was discussion around the question of efficiency for the industry, as multiple investment organisations carry out their own proprietary analysis to obtain these insights. The group highlighted the importance of digging into a company’s lobbying activities, to understand the alignment between their public messaging and behind-the-scenes influence on climate policy.

Assessing managers’ commitment and action towards climate transition
The group, comprised largely of fund selectors, discussed how to assess an investment manager’s commitment and action towards climate transition. Similar to an investment manager’s analysis of a company, the key is getting clarity of what they do and how they do it, vs. what they say.

Key takeaways:

  • When it comes to engagement, managers are typically able to give an example of it, but can struggle when asked to give an example of an engagement that was effective. There is concern that managers may have only a handful of carefully picked examples, rather than systematically capturing engagement activity and outcomes, with the evidence and data to back this up
  • Another area highlighted as extremely important by the group is the organisational alignment of ESG-aligned resources within the investment manager, including how close they are to the investment process
  • Many investment managers sign up to collective initiatives, and while the group felt these were generally worthwhile, managers may be using these collective initiatives to burnish their reputations, while having very little or no contribution to the collective effort itself