Decarbonising iShares' LQD ETF

By applying our 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.

These results are achieved while holding duration and sector exposure relatively neutral. When allowing sector weights to vary, climate results strengthen further.

FIONA has been created to provide analysis and climate-positive enhancements to fixed income portfolios. We recognise the limitations on data in this space, and so FIONA has been designed as a data-agnostic framework, to use the best current data, and incorporate new data as it becomes available.

We also recognise the difficulties in aligning to both spot and forward-looking climate data, and so consider a portfolio’s impact in both scenarios. This analysis advances the proposal that there can be alternative index construction rules and associated passive ETFs that enjoy similar investment profiles as LQD but have substantially improved climate-alignment.

About the authors

Josephine Richardson

Managing Director, Head of Research

Based in London, Jo leads AFII’s research and a global team supporting fixed income investors as they align their portfolios with climate and sustainability goals. She joined AFII after 18 years in fixed income markets at JPMorgan.

Johan Jarnmo

Associate Director, Portfolio Strategy

Johan develops tools and analytics that help fixed income investors invest in a climate- and nature-positive way, including AFII’s portfolio tools Co₂liseum and FIONA. He previously worked in Deloitte’s Risk Advisory practice.