Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Social benefit added in green bond fund revamp
Amundi has revamped its old responsible investing green bond fund as a broader strategy which looks to also mitigate against societal damage from the shift to renewables.
The new fund, ‘Just Transition for Climate’, retains the fixed income and credit investment strategies, with a sharper focus on carbon reduction, while integrating scores to do with employment, communities and “society at large”.
The active strategy places an emphasis on engagement with companies as they transition to a low-carbon world, including their shorter-term goals and progress, which is a strong trend particularly among global equity managers.
Paris-headquartered Amundi was a pioneer in the development of responsible investment, is “fully committed towards a fair green transition which takes into account social criteria”, the firm said in a statement this month (April 7).
The original fund was launched in 2015 in the wake of the COP21 (the United Nations’ Paris Agreement called the 21st Conference of the Parties), whose objective was to fight global warming. The next conference is scheduled to take place in Glasgow in November.
The benchmark for investment performance for the strategy, and overall securities universe, is the Bloomberg Barclays Euro Aggregate Corporate index, composed of 3,122 corporate bonds. Amundi uses a negative screen based on climate and social criteria to allow only issuers that have affirmed a goal of reducing their carbon footprint, do not present an extreme physical risk and for which the ESG rating and ‘Just Transition’ rating are higher than or equal to ‘E-2’. The ranking has ‘A’ as the highest and ‘G’ the lowest.
The portfolio is designed to invest towards a fair transition with a focus on:
- Climate, by maintaining the carbon footprint 20 per cent lower than benchmark and annual reduction
- ‘Just transition’, seeking to achieve a score above that of the benchmark, and
- ESG criteria based on Amundi’s ESG scoring method with a target score higher than that of the benchmark.
The ‘Just Transition’ concept is based on the premise that a transition to a low-carbon and environmentally friendly economy should be acceptable for all, and therefore must address the social dimension of such a transition.
On employment, Amundi says issuing companies must ensure that employees can find jobs in sustainable businesses and contribute to how these transitions are organised and implemented, that they are protected from the harmful effects of climate change.
Consumers are also considered, so that corporations must ensure that consumer goods are accessible to all at affordable prices, and with local communities, they must ensure that the costs and benefits of the transition are equitably shared. Amundi believes that to have a just transition, all stakeholders to fully play their role and participate in constructive dialogue.
One of the big European-based companies which fits the bill as an approved issuer for the strategy is ENGIE, the global energy services company which has a significant presence in Australia. The company made headlines in 2016 when it announced it would close its big coal-fired power plant at Hazelwood in Victoria’s La Trobe Valley, which it did the following year.
ENGIE subsequently closed or divested all its high-carbon-emitting facilities in Australia and built about 1,000 MW (gross) of renewable (wind turbine) and gas-fired generating plants in Victoria, South Australia and Western Australia with more renewable projects planned.
Anne Chassagnette, the company’s head of CSR, said: “For several years ENGIE has been committed in a process to reduce its greenhouse gas emissions, in particular by phasing out coal by 2025 in Europe and 2027 in the rest of the world.”
