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The worsening health crisis currently
spreading around the world has shown us
just how extremely vulnerable our biological, environmental and social conditions
are. Considerable efforts are being made to
prevent the COVID-19 virus from spreading, but it is undoubtedly too soon to say
how the epidemic will influence international opinions on global issues such as
climate risk, personal protection and good
governance.
Those investors who have opted to incorporate ESG and climate issues into
their portfolios will emerge from the crisis
with even greater faith in their convictions
and all the keener to take more action for
the future. New investors will undoubtedly soon join the movement to transform
our economies in the name of sustainable
development. Or at least we can hope so.
If the collective asset management
industry is to meet the needs of these investors, it must strive to offer ESG and
climate investment solutions covering a
wide range of asset classes. Steering credit
investments poses considerable challenges if we consider the growing share of
corporate bonds in portfolio allocations
as sovereign bond yields have shrivelled.
The other challenge for asset management
companies is to develop a range of services
that are suitably tailored to the requirements of each individual client in terms of
reporting, impact measurement and the
construction of customised ESG and climate investment universes.
An investment universe
extending beyond the green
bonds market to target the
very core of institutional
investment portfolios
All of us here at CPR AM have taken on
board the need to understand ESG and climate issues. All our staff members
have now been made aware of ESG and
climate risk issues so are better qualified to understand the needs and meet
the expectations of our investors. CPR
AM launched Climate Action, an international equity fund dedicated to the
companies most committed to the energy
transition, in December 2018; it is now
going to roll out this theme for bonds.
“When it comes to bonds, we aim to incorporate the widest possible scope of issuers
committed to tackle global warming and
not consider the emerging green bonds market specifically, which currently accounts
for less than 5% of euro investment grade
bond indices and is not always synonymous with low carbon emissions”, points
out Noémie Hadjadj-Gomes, Head of Research at CPR AM.
Two quantitative approaches
to incorporating ESG and
climate criteria
CPR AM’s new fund, Climate Bonds, will
focused on the euro-denominated investment grade bond universe and will
apply the same quantitative investment
philosophy as the Smart Beta Credit ESG
fund launched in late 2018. CPR AM’s
quantitative ESG and climate credit solutions are developed on the back of close
collaboration between the research, fund
management and credit analysis teams,
with the support of the Amundi group’s
non-financial research (for ESG aspects)
and specialist external providers (for specific climate data).
Systematic strategies are free of emotional bias and more transparent, and
they offer the advantage of covering broad
investment universes, which is particularly valuable given the growing size of
the bond market. In addition, these quantitative approaches may easily be adapted
into a dedicated format, for instance to
adhere to a specific ESG investment charter, to comply with financial regulations
restricting the eligible investment universe or with a given regulatory capital
requirement (SCR), or to match a duration structure suited to the investor’s liabilities (ALM), etc.
CPR AM’s Smart Beta Credit ESG fund
offers a defensive and ESG-based alternative to traditional euro investment
grade bonds. “We take the view that it is
not by overweighting companies with the
best ESG behaviours that we will generate
performance but rather by excluding companies with poor ESG behaviours because they may damage the reputation and hence
the performance of issuers in the portfolio.
This argument is even more valid in the
bond segment as specific incidents can take
a heavy toll on performance”, says Noémie Hadjadj-Gomes.
“Our guidelines for the Climate Bonds
fund were to set up an investment strategy that would deliver returns similar to
those of the bond asset class but with an
investment universe focused on factoring
in climate issues”.
Liquidity risk controlled permanently
“The fund managers also monitor liquidity risk continually in order to diversify the
portfolio and optimise transaction costs.
They do so by factoring in a liquidity score
calculated in-house for each name, managing turnover constraints depending on market conditions, and working on the number
of portfolio lines”, emphasises Noémie
Hadjadj-Gomes.
Fund managers therefore do not follow
a fully systematic approach. They incorporate the credit research team’s opinions
(vetoes / top pans / top picks) and may
invest in the primary market in order to
capture issuance premiums.
“It is a wellknown phenomenon. A bond’s price tends
to rise in the days following its issuance,
before being incorporated into the bond indices. By participating in the primary market, and provided the bonds pass through
the filters used to build the ESG/climate
universe and are approved by the credit research team, our fund managers are able to
improve a portfolio’s returns”, points out
Noémie Hadjadj-Gomes.
Close analysis of each
company’s climate policy
and carbon footprint
When establishing its climate universe,
whether for its equity fund or for its dedicated bond solutions, CPR AM applies a transparent methodology developed in
partnership with CDP (Carbon Disclosure
Project), a pioneering non-governmental
organisation specialising in the disclosure of carbon data worldwide.
“Our approach is multi-sector and diversified, with the aim of promoting the transition to an economy that is globally compatible with the targets set out in the Paris
Agreement. Our selection encourages companies that are in the best position to manage climate risk”, explains Noémie Hadjadj-Gomes. CDP’s scoring methodology
is based on the climate policies published by companies rather than on econometric
sector models.
CPR AM’s climate investment universe includes companies that have
received the best scores from CDP, as well
as companies whose carbon emissions are
consistent with the target to limit global
warming to 2 degrees as per the Paris
Agreement. This appraisal, referred to as
SBT (Science-Based Targets), is the result
of joint expert assessments carried out
by the World Wildlife Fund (WWF),
World Resources Institute (WRI), CDP
and UN Global Compact. We then apply
two other filters, one for ESG criteria and
another to exclude companies involved in
controversies.
Services to assess the impact
of its investment decisions
Besides developing the investment building blocks from which to access the credit
market with an ESG and climate dimension, CPR AM provides services to measure the impact of the strategies applied
by its fund managers. Carbon reporting
is thus widespread in CPR AM’s range of
funds, and its fund management teams
are able to measure the impact of each
investment decision directly using their
front office tool before placing any orders.
Company temperature is another of the
indicators we follow to monitor the official
environmental targets set by companies
on a long-term temperature trajectory.
Aligning a portfolio with a 2°C trajectory
(corresponding to the upper end of the
global temperature range that the Paris
Agreement recommends not exceeding)
implies picking companies which have
decarbonisation strategies that are consistent with the requirements of the ecological transition. Around 90% of MSCI
Euro companies (in terms of capitalisation) replied to the CDP this year and
will have their temperature measured.
“We are currently working on developing
an aggregation method that is more effective than a simple weighted average of the
temperatures of companies in our portfolio,
as this will give us a more reliable gauge
of the temperature of our investments”,
concludes Noémie Hadjadj-Gomes.
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