Building carbon transition fixed income portfolios

In this paper, we highlight our active management approach to a carbon transition investment framework for fixed income assets, that is capable of harvesting opportunities while also reducing the risks involved in the transition to a low-carbon world.

In preparation for a recovery in global economic activity, governments, asset owners, investment managers and corporations are increasing their focus on reducing carbon dioxide (CO2) emissions. Many fiscal stimulus packages have been tied to green policies, particularly with the goal of achieving net zero emissions by 2050; this is critical to meeting the Paris Agreement target of limiting global warming to well below 2 degrees Celsius (˚C), preferably to 1.5˚C, compared to pre-industrial levels.

In this environment, actively managing a carbon transition portfolio has become essential to navigate the impacts of climate-driven technology and policy changes on portfolio performance. In terms of policy, as we outlined in our climate policy thematic article in our 2021 Long-Term Capital Market Assumptions1, we expect policymakers to take significant actions to achieve this emissions reduction. This has 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%2 .

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 in an issuer's balance sheet and cash flow expectations which could in turn have material impacts on credit fundamentals and ratings.

From a technology 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 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 the paper, we leverage the Net Zero Investment Framework put together 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 undertake alignment of their portfolios towards net zero3.


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1 Wu, J., Siegert, C., Aguirre, N., Juyvns, V., Lintern, T., Mandel, B. "Weighing the investment implications of climate change policy," J.P. Morgan Asset Management 2021 Long-Term Capital Market Assumptions.
Battiston, S., Jakubik, P., Monasterolo, I., Riahi, K. and van Ruijven, B. "Climate risk assessment of sovereign bonds' portfolio of European insurers," European Insurance and Occupational Pension Authority (EIOPA) Financial Stability Report (December 2019).
3 IIGCC, "Paris Aligned Investment Initiative: Net Zero Investment Framework for Consultation" (August 2020).