By Elliot Gulliver-Needham
Buying bonds in a company that emits a lot of carbon dioxide might seem weird for a fund with ‘climate’ in the name, but Rory Sandilands, manager of the Aegon Global Short Dated Climate Transition fund, argued that it is essential in pushing these companies to transition.
Aegon has a range of climate transition bond funds that have launched over the last couple of years, with an investment grade fund set to launch later this year.
“We’re not avoiding carbon by investing in what we think are the best names. It’s the future pathway of those names that matters,” explained Sandilands.
“We’re not simply assessing what a company has done today,” he said, but instead which companies can “drive that shift” towards cutting pollution.
Companies are investigated for their plans looking forward, considering their final target towards zero emissions, interim targets along the way, and their exact strategy to get to net zero.
For all companies, Aegon asks if their corporate strategy actually aligns with their ambitions. “In other words, are the companies talking the talk, or are they walking the walk as well,” said the manager.
“The reality is that climate risk isn’t getting priced in, particularly in a fixed income context”
Sandilands argued that bonds were an underutilised way to push companies towards transition because unlike equities, bonds expire after a fixed period of time, forcing investors to actively decide whether they want to buy more debt from a company refusing to change its polluting habits.
“The reality is that climate risk isn’t getting priced in, particularly in a fixed income context,” meaning that there is rarely a premium on pursuing a company focusing on sustainability, unlike in the equity world where the label often comes with a premium.
The bond funds don’t exclude sectors, instead focusing on where they can make the biggest impact, as Sandilands said he would avoid a “low influence name” if it doesn’t have a particularly big footprint, since “it can do a fantastic job, but it’s not actually going to change the climate proceedings”.
Categorisation
Diversification is another key part of the fund, as investing in only companies that were already ahead of the curve on low emissions leaves you with quite a small group, mainly focused on sectors like tech.
The fund groups companies into five categories: Leaders, prepared, transitioning, unprepared, and laggards.
The plan is to slowly cut out laggards and unprepared companies from the company as either their transition plans get better or the manager chooses not to invest in companies failing to address their pollution.
Sandilands and his colleagues also focus on engagement, pushing these companies to do better on their climate targets and moving away from actions that cause global warming.
“If we have key objectives, we can then approach companies to see if you could do these three things, we will be able to improve your category,” he explained.
As a key example, he pointed to Iberdrola, the Spanish utility company that owns Scottish Power.
The firm has phased out coal, and has now sold significant portions of its gas fired portfolio to a Mexican business (30 per cent of operating capacity), and has clear targets for net zero by 2039.
“It’s not that Iberdrola is not emitting a lot of carbon today, but their pathway over the next few years will see a significant drop in that carbon footprint, because of the steps they have taken,” he said.
European utilities as a whole are a favourite of the portfolio, due to their “clear and robust” plans to move away from coal fired power stations, and longer term plans to move away from gas too.
This has meant that while 11 per cent of the the overall exposure of the fund is to European utilities, it’s in excess of 50 per cent of its carbon footprint.
It’s not that Iberdrola is not emitting a lot of carbon today, but their pathway over the next few years will see a significant drop in that carbon footprint, because of the steps they have taken.
Meanwhile, he said it was “challenging to see oil and gas explorers and producers move beyond laggard,” meaning they would generally avoid them, and the banking sector is more homogeneous in its climate plans, leaving little room for them to make a difference.
Instead, there is “greater divergence” in sectors such as real estate, leaving the fund opportunities to push up companies that might be falling behind their peers.
Retail includes companies like Segro and Logicor, with Segro already being classified as prepared as it has moved to cut its carbon emissions significantly.
Meanwhile, Logicor hasn’t established targets or set a pathway and is “quite poor on disclosure”, classifying it as a laggard, leaving the Aegon team to push it to make the changes, with the threat that it will not invest if the company doesn’t make enough effort.
There have been failures of engagement: Athene, a US insurance company, where the fund “didn’t get any response at all, so we just moved on”.
“A failure of engagement doesn’t change the price,” added Sandiland, meaning the company can still reap the profit from the investment and just not go back.
