Climate change is the focus of ESG investments

Within the ESG investment, the managers are paying special attention to those companies that help to meet the Paris objectives in relation to climate change, whose aim was to limit annual warming by 2C at most in relation to pre-industrial levels.

As Petra Daroczi, ESG fixed income analyst at Aberdeen Standard Investments, pointed out, long-term investors have a chance to take care of our planet’s environment.

Not only because it may be the “right thing to do”, but also because the most resilient companies will survive in the long term and offer more sustainable returns.

Which companies do the managers invest in? The investment focus is on those companies that are already meeting decarbonization targets.

By including bonds, “a viable decarbonization strategy would help in part to ensure that the company’s business is resilient, that it will be able to generate cash flow, pay off its debt and continue to access capital markets at a reasonable cost of financing,” said Darozci. 

Find out more details about the importance of the transition to a low-carbon economy and read the latest business news with our companion app, Born2Invest.

In the long run, these investments are more resilient and profitable

The transition to a low-carbon economy is particularly challenging for the public service sector in the Asia Pacific region, given its dependence on low-cost, high-volume coal-fired power generation. 

However, those companies that embrace these decarbonization goals are more resilient to climate risk, with more resilient business models, especially in the long term.

ETFs focused on climate change

This idea, along with increased investor interest in the wake of the coronavirus pandemic, means that fund managers are expanding their range of socially responsible vehicles with climate change funds and ETFs.

Amundi has just expanded its ETF range. These are the Amundi Euro iSTOXX Climate Paris Aligned PAB UCITS ETF, the Amundi MSCI Europe Climate Paris Aligned PAB UCITS ETF and the Amundi MSCI World Climate Paris Aligned PAB UCITS ETF2.

Thus, this family of funds incorporates a 50% reduction in carbon intensity along with additional activity exclusions.

It is fully complementary to the existing Amundi climate change ETFs, which are expected to meet the criteria of the EU Climate Transition Benchmarks (CTB) and designed for those investors who want a transition to a low carbon economy while maintaining broad market exposure.

However, it is not the only one. Lyxor is also expanding its range of climate change ETFs, with four new ones that exclude companies active in the coalfields from their investment spectrum, and above certain thresholds for carbon-intensive oil, natural gas, and electricity production.

They also avoid companies that undermine the EU’s environmental goals and those involved in controversial weapons, tobacco or violating social standards.

Arnaud Llinas, head of Lyxor ETF & Indexation, justifies these launches by reminding that “the EU’s climate benchmarks are just one way in which Europe is taking a lead on climate.”

Reticence towards green bonds

Green bonds are also playing a major role in this interest in climate change. However, investors are less likely to invest in these corporate bonds.

That is because fixed-income investors were already skeptical of stranded bonds in their early days of trading because of the need for a regulatory framework that defines the eligibility criteria for the use of proceeds from such stranded bonds. That includes the minimum energy improvements to be achieved, how these should be quantified and disclosed, and the extent to which the transaction should be subject to the issuer’s overall transition strategy.

Only in this way will it be possible to gain the confidence of investors and allow the transition bonds to become a more accepted market.

With the right framework in place, energy transition bonds could drive the next evolution in terms of capital allocation towards a low carbon economy.

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(Featured image by marcinjozwiak via Pixabay)

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