A new report “from the coalface” of super fund investing has gone some way to quantifying the cost of shonky investment management, with members potentially losing out on hundreds of thousands of dollars.
Surging equity markets have driven the Future Fund’s return higher, but its prediction that inflation will be stickier than expected has been born out and it “remains conscious of the potential for significant deterioration”.
Which sovereign bonds fit in climate-aware portfolios?
“Increasingly – certainly in Europe, Australia, Japan and many parts of the US – institutional investors and asset owners want to deliver explicit climate results,” says Tom Lyons, head of climate for Allspring’s global fixed income research team. “They want to contribute to decarbonisation wherever they can, especially where it corresponds to good performance from their portfolios.”
While equities have historically been the easiest part of the portfolio to decarbonise, fixed income – and particularly sovereign bonds – can achieve greater impact in the real economy. To figure out which sovereign bonds belong in climate-aware portfolios subject to attractive pricing, Allspring looks to answer three questions: How much decarbonisation does the world need and expect from the sovereign? How much decarbonisation is the issuer likely to deliver? And what are the implications for credit fundamentals?
“If the sovereign in question has stable to improving fundamentals, and has a compelling strategy with real credibility when it comes to decarbonising, those are the kinds of credits we want in the portfolio,” Lyons says. “If we can answer those three questions we should be able to satisfy ourselves as to which sovereigns belong.”
Australia and Chile provide an interesting case study. At a glance they’re pretty similar; they have around the same population – between 20-25 million – are both relatively well-endowed with renewable resources and transition metals, have recently elected progressive governments, and have both made concrete progress on decarbonisation. But Australia’s “superior fundamental strength and social cohesion” provide powerful advantages. It’s a well-run country that can put good ideas to work, while Chile is more politically divided with greater income inequality.
“We can look at Australia and say that it’s going to be pretty tough for it to transition away from its historical dependence on easily-accessible, very affordable coal,” Lyons says. “However, it has some of the best wind and solar resources in the world; it has the ability to both decarbonise its domestic economy as well as sustain what are world-leading exports of products like iron ore and other minerals which – if produced with clean energy – should earn a premium in global markets.”
“Although there are challenges in the immediate-term, Australia has some pretty promising climate driven advantages as it relates to economic growth over time… (in contrast, even if it had) the most progressive policies in the world, we’d have to handicap Chile’s likelihood of delivering certain results based on institutional strength considerations.”
Allspring also considers a country’s susceptibility to significant events that can confound their ability to decarbonise their economies.
“Think of geopolitical events that have recently impacted energy transition in all parts of Europe as a function of the Ukraine War,” Lyons says. “Think of droughts in different parts of the United States that have handicapped the ability to generate clean energy from nuclear facilities. Think about Russia itself, which is struggling to finance its own fossil-based economy – let alone one driven by renewable sources.”
Still, portfolio decarbonisation can be difficult for benchmark-aware investors like super funds, which have to invest with one eye on the Your Future Your Super performance test and can’t take on too much tracking error from the indices against which they’re measured.
“The systemic, cross-economy perspective and the holistic approach are useful levers when managing a portfolio in a way that optimises tracking error,” Lyons says. “Our climate-driven strategies are transition strategies; they’re not designed to minimise emissions in the immediate term. We’re not going to concentrate the portfolio in benign parts of the economy that have never been heavy emitters.
“The purpose of our strategies is to provide the funding for even the most carbon intensive parts of the economy to decarbonise, and that includes utilities, oils and gas and metals and mining. We explicitly target companies in those sectors that are making real progress on decarbonisation.”
