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A changing climate in fixed income: 360°, Q1 2021

What is our current view of fixed income markets? And where do we see the best relative value? In our latest edition of 360°, Andrew ‘Jacko’ Jackson, Head of Fixed Income, Mitch Reznick, CFA, Head of Research and Sustainable Fixed Income, and their team of specialist investors consider the areas that have the potential to deliver superior risk-adjusted returns.

After a year of tumult, can the silver lining be green?

A global, public health crisis; social inequality and unrest; record economic retraction and violent swings in financial markets. To say that 2020 was a very challenging year might be the mother of all understatements. The primary driver for the turbulence in fixed-income markets was, to state the obvious, the Covid-19 pandemic and its associated effects on society and the economy. As credit investors, typically we would have some miserable, lugubrious take on such market events. Although there certainly will be a reversion to that base-case disposition sometime in the future, we actually see a silver lining in all of this.

If nothing else, the Covid-19 pandemic exposed the importance of addressing environmental and social challenges. Within investments, “sustainability” came under the spotlight, drawing attention from all corners of the capital markets. Indeed, 2020 was a record fundraising year for sustainable investment funds, with global net assets reaching close to $1.6tn. It was also a record year for green and sustainability-themed bonds and loans with issuance of $700bn for an 80% jump year-on-year, with substantial growth coming out of the US. For these reasons, we decided to take a thematic approach to this edition of 360°, viewing each section through the lens of sustainable investing.

Spotlight on sustainability: issues in focus this quarter

In this issue of 360°, we also take a closer look at three areas:

  • Climate-focused solutions: how can we tackle climate goals in credit portfolios?
  • Valuations and technical: the rise of green bonds
  • Sustainable fixed income: there is no going back on the green transition

See below for a flavour of these sections or read the full report for a more comprehensive picture.

Credit solutions can be built around a spectrum of decarbonisation objectives: minimising emissions today; supporting climate leaders or innovators; influencing the energy transition; meeting Paris-aligned or net-zero targets, among others.

The processes and tools that we have established within the Fixed Income team means that we have set a solid foundation for developing climate change-themed solutions tailored to the needs of our clients.

During the pandemic, the market for sustainability-related debt instruments has experienced exponential growth as investors increasingly take a more holistic approach to capital allocation. More recently, this can be observed through the increased issuance of sustainability-linked and SDG-linked bonds. We believe this trend will likely accelerate in 2021.

The EU’s substantial budget to finance the green recovery, together with the principles of the Green Plan and the regulatory proposals of the EU Taxonomy, shows that there is no going back on the green transition. The prospects of investing in a secular trend that is underwritten — at least in part — by government provides confidence that the trend will continue along its path, likely at an accelerated rate. Overtime, we expect the EU budget will likely trigger more supply of sustainability-themed debt issuance. In turn, this will create a deeper, more developed and more liquid sustainability-themed debt market and provide great opportunities to finance positive change. Green is not the new black; it is here to stay.

Fixed Income Quarterly Report

Q1 2021
 

Archive: previous editions of 360°

As fixed income markets have moved through the economic cycle, our thinking has also developed – take a look at some of our previous reports to see how the investment landscape has changed over the past year.

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