Aligning financial performance and climate in active fixed income

Positive climate impacts and financial returns are not incompatible. Read how LGIM’s AFI team factors climate change into our portfolios.

Executive summary

• Instead of viewing climate impact and financial returns as conflicting, we think investors should see them as goals that can be addressed simultaneously.

• We believe there are two main approaches to sustainability: net zero, where investments are selected to be in line with the goal of net zero emissions by 2050, and the UN Sustainable Development Goals, which include climate but also include many other environmental, social, and governance (ESG) considerations.

• Fixed income assets display specific characteristics when valuing the impact of climate change depending on their lifespan. In our view, longer-maturity securities are significantly more exposed to climate risk than shorter[1]term investments.

• Managing a credit portfolio with financial and net-zero objectives involves balancing yield and climate considerations, with an emphasis on measurable decarbonisation. We believe selecting appropriate data to focus on is critical

• At LGIM, we seek to engage, rather than simply exclude. Unilaterally divesting holdings is not guaranteed to lead to the decarbonisation of the real economy and indeed could impede necessary investment in climate solutions.

• LGIM’s Active Fixed Income teams use our Destination@Risk tool to set fund objectives around temperature alignment, understand macro trends and transition opportunities, evaluate climate risk concentrations in portfolios, and engage with companies on their climate positioning.

• This framework can help us identify the climate-related risk and temperature alignment of individual companies and, by extension, make investment decisions that can both seek to reduce risk and improve the environmental impacts of their portfolios.