Anthropocene Fixed Income Institute

News around Glencore with regards to both previously unknown methane emissions as well as an activist hedge-fund approach for splitting the company has implications for climate minded iTraxx Main investors.

We outline, based on historical portfolio experiences, what we see as the main potential usages of  CDS indices in general ESG investing, as well as for particular CDS indices with ESG tilting.

iTraxx Main in its MSCI ESG version (S35) has outperformed its standard equivalent in 2022, mainly due to non-ESG index exposure to a number of utilities, especially former low-beta credit Fortum.

Inflation is pushing central banks to act at the same time as central bank climate commitments are growing. We identify EUR bonds from heavy fossil, non-Eurozone issuers like Shell, BP,  Glencore and Schlumberger who currently are big holdings in the ECB's CSPP portfolio to be at risk of early sell-off.  

(8 June 2022)

 We observe an outperformance for carbon intensive issuers in Mar/Apr of this year, most likely driven by elevated oil prices following the invasion of Ukraine. We see a reversal since mid-May, and an underperformance of carbon intensive issuers in this last 6-week period.

(27 June 2022) 

On July 4th, the ECB announced further steps to incorporate climate change into their monetary policy operations. The Climate road map announced in July 2021 had already given H2 2022 as the timeline for changes to be made, so getting firmer practical commitments to action was expected. Annual redemptions from CSPP are large, and so should have a material impact on the spreads of issuers whose weightings are being reduced. Our analysis shows that many of the high emitting issuers have termed out debt structures, meaning that the impact from only maturing bonds not being reinvested could be more limited. 

We analyse negative basis packages in terms of green bonds and how they could drive transition, with an example in GM's recent green bonds. 

(1 Aug 2022)

We analyse P&L and carbon footprint effects had the ECB decarbonised its portfolio from 2017 rather than commencing it in Oct 2022, as recently announced.

(20 Sep 2022)

 Given the BoE has made a clear near-term target for reducing carbon intensity, and has now begun to sell bonds, the portfolio tilt will be accelerated. We present the highest emitting issuers per sector within the holdings of the CBPS, and their recent performance which shows the impact of QT flows to date. 

(04 Nov 2022)

Passive investment dominates public fixed income markets, and bond Exchange Traded Funds (ETFs) have grown in popularity. Among the most used product in the marketplace is the iShares LQD ETF, with net assets of USD 38.3bn.

By applying AFII’s portfolio management tool, Fixed Income Optimisation for Net zero Alignment (FIONA), we show that LQD’s negative climate footprint can be considerably reduced without a significant impact on its performance.

(15 Dec 2022)

We analyse a 10 Jan speech in which a strengthened climate policy trajectory is outlined by the European Central Bank (ECB), addressing many of the prior concerns raised in AFII research.

(10 Jan 2023)

Based on the perceived shift in ECB policy on climate exposure in the CSPP, this brief note  analyses the size of the CSPP vs market and issuers that might be particularly exposed.

(11 Jan 2023)

The decarbonisation of fixed income portfolios is critical if we are to address global warming, and passive fixed income products can play a huge role. We take a closer look at four Exchange Traded Funds using the Paris-Aligned Benchmark (PAB) label, introduced in 2019 by the European Union. We find that these products deliver substantial climate enhancement without compromising performance. However, their complexity raises some serious challenges for investors. 

(09 Feb 2023)

 In December 2022, we used our Fixed Income Optimisation for Net zero Alignment (FIONA) framework to analyse the iShares LQD ETF portfolio and create two parallel portfolios offering an improved climate impact. This note analyses the relative performance of the FIONA portfolios during Q1. 

(14 Apr 2023)

In this note we extend the AFII Fixed Income Optimisation for Net zero Alignment (FIONA) framework to consider the iShares JPM EMB ETF, an emerging market sovereign ETF. By applying FIONA, we show that it is possible to improve the climate footprint of a sovereign EM portfolio without a significant impact on its historic performance. Climate improvements are more significant when reweighting between regions.

(11 May 2023)