The role of fixed income in financing the transition should not be underestimated. Many investors have taken an ‘equity first’ approach when considering their sustainability objectives. However, climate risk is not exclusive to equities and can impact other asset class exposures, so they need to be considered. For investors, the role of fixed income for climate aware investors is also important given that bonds can play an important role in stabilizing returns in multi-asset portfolios.
Investors are increasingly using fixed income rules-based strategies as they seek to mitigate climate risk and take advantage climate-related opportunities. These strategies, similar to their equity equivalent, are designed to assess current and expected carbon emissions, the likelihood of companies meeting carbon targets, and apply qualitative overlays.
A rules-based strategy can offer investors a comprehensive approach to climate investing and account for the complexities and nuances of a corporate fixed income universe.
