Engaging with bond issuers on their climate transition path to net zero is not a short-term endeavour but is worth the effort, according to Rory Sandilands, co-manager of the Aegon Global Short Dated Climate Transition Fund.
Sandilands says it can be difficult for fixed income investors to understand how best to reduce the carbon footprint of their investment portfolios, with the focus historically having been on equities. But he says engagement is not the sole preserve of that asset class, pointing out that bond investors also have plenty of levers to pull, both individually and collectively.
“We don’t simply exclude worst emitting companies and sectors, rather we focus on improving transition profiles,” he says.
“Making change requires bilateral and collaborative engagement, combined with active involvement in industry bodies seeking to influence climate change. While this activity is resource intensive, we believe this approach is in the best interest of investors.”
Within the Aegon Global Short Dated Climate Transition portfolio, Sandilands points to several recent instances of engagement where change is progressing.
“We have been engaging with a focused group of companies on net zero targets and their progress towards decarbonisation,” he says. “This approach has focused on issuers categorised as ‘Unprepared’ or ‘Laggards’ in high influence sectors.
“One such example is Ford, where our Responsible Investment team engaged on science-based and green financing targets. Engagement is often about encouraging better disclosure and improving understanding. This engagement has resulted in better insight into their climate transition plan and their emissions reductions targets.”
Another example is SSE plc.
“We have had excellent collaborative engagement on strengthening the company’s net zero ambitions, identifying areas for improvement in their plans, such as short term targets.”
More broadly, Sandilands says that, as a fixed income investor, managing downside risks is crucial given the asymmetric risk profile of bonds, making security selection key. As part of this he says there are patterns worth observing across regions and sectors.
“Geography matters,” he says. “We have noted Pan-European companies often fare better. This is even more pronounced in energy and utility sectors.
“We must also acknowledge that some sectors are also still strategically challenged, with oil and gas explorers and producers struggling to move beyond ‘laggards’ and the banking sector largely becoming more homogeneous.”
