Posted inESG

Transition tilt to offer alpha for climate investors

Beyond mere exclusion, investors should focus on those companies well-placed to transition to a lower-carbon world and offering goods and services for climate change mitigation, says Aviva Investors.
Wind Turbines in a Wind Farm with a Coal Fired Power Plant in the Background

Investors should support transition-oriented companies with low decarbonisation and physical impact risk, rather than limit their universe to businesses with obvious green credentials.

“We can’t pivot to a lower carbon world if all we do is rule out the poor performers and only invest in companies that provide solutions to climate change,” said Colin Purdie, chief investment officer for credit at Aviva Investors.

Ultimately, since all companies need to adjust for a warmer, lower carbon world, the potential opportunity set is much wider than the current focus of many market participants.

“As investors, it is our responsibility to look beyond small pockets of green finance to engage and mobilise the liquidity of the wider credit market to assist in climate transition and the achievement of net zero carbon emissions,” added Purdie.

Casting a wider net

To implement its view, Aviva Investors has launched a climate transition global credit strategy. This uses the wider transition lens Purdie believes is essential to help investors capture positive climate outcomes.

“Companies that don’t adjust their business models will be less attractive to investors and will present a less compelling investment case over time,” explained Purdie. “Climate laggards may find that their financing becomes more expensive than that available to climate leaders.”

The strategy excludes investing in fossil fuel companies. Instead, it targets solutions providers that generate current or future material revenue by addressing climate-related issues. These themes include the shift to renewable energy sources, sustainable transport and more environmentally-conscious lending.

This type of approach is also necessary to capitalise on the growing range of sustainable bond issuers in line with the supporting policy and regulatory landscape.

A new Moody’s Investors Service report, for example, says the remainder of 2021 will see notable growth in sustainability-linked bonds, as issuers seek access to sustainability-minded investors.

More specifically, after global issuance of green, social and sustainability (GSS) bonds set a record of $231bn in the first quarter of 2021, Moody’s is now saying that strong issuer and investor interest in sustainable bonds makes it likely the combined market will eclipse $650bn for the whole year.

Growing in influence

Applying a transition lens also highlights the growing role of bond investors in shaping sustainability goals.

The traditional approach to ESG engagement has been in the equity space, but recent years have witnessed credit investors grow an increasingly loud voice. “There has been a pivot [by many companies] towards debt in the capital structure. As a result, bond investors have become more important,” said Purdie.

This trend will likely continue as investors get more discerning amid policy tightening and a more selective mindset.

“Financing conditions have been fairly loose in recent years and it has relatively easy for companies to roll over finance, but this won’t always be the case,” explained Purdie. “Credit investors will have more of an influence going forward.”

Part of the Mark Allen Group.