20 September 2022
Actively managing portfolios' carbon emissions has become essential for asset owners to successfully navigate climate risks, technological disruption and public policy changes, as well as to mitigate the impacts on portfolio performance.
Net zero portfolios are an approach to investing in companies and governments that reconciles climate commitments across the financial sector, with the need for a transformation of the global economy, and the development of science-based transition pathways. Actively managing portfolios' carbon emissions has become essential for asset owners to successfully navigate climate risks, technological disruption and public policy changes, as well as to mitigate the impacts on portfolio performance.
We expect policymakers to take significant further actions to achieve this emissions reduction. This policy response will have material consequences for passively managed fixed income portfolios: according to a 2019 study, insurance portfolios with sovereign bond holdings that are most exposed to high-carbon industries could suffer a decline in value of up to 4%. Corporate bond portfolios will also feel the impact of climate change policies. The introduction of emissions trading schemes or outright carbon taxes are likely to expose costs previously unaccounted for on an issuer's balance sheet, which could in turn have material impacts on credit fundamentals and ratings.
From a transition risk standpoint, the increased importance of renewables will cause more assets to become stranded – from old intellectual property, such as combustion engine patents, to physical property, including coal power plants and energy-inefficient real estate. This risk can also be an important driver of value in actively managed fixed income portfolios, where asset-heavy fixed income sectors such as utilities, energy, automotive and basic industry represent a large proportion of corporate bond indices.
Throughout this paper, we leverage the Net Zero Investment Framework outlined by the Institutional Investors Group on Climate Change (IIGCC), of which J.P. Morgan Asset Management is a member. The framework serves as a comprehensive guide to help institutional investors align their portfolios towards net zero.
We also highlight J.P. Morgan Asset Management's unique active management approach to carbon transition fixed income portfolio management, which can harvest opportunities while also reducing the risks involved in the transition to a low-carbon world.