Do You Know Your Bond Portfolio’s Carbon Footprint?

Markus Peters: Salima, thank you very much for joining me here today.

Salima Lamdouar: Pleasure to be here with you, Markus.

MP: Salima, we know transitioning to a net-zero carbon economy is vitally important. And to support that journey, sustainable bond investors should really monitor the carbon impact of the corporate bonds in their portfolios. Is there a specific measure they should use?

SL: As a starting point, a number of data providers, such as MSCI, have created tools that allow us to compare our portfolio’s carbon footprint versus that of a benchmark. One measure that we look at as bond investors is the weighted average carbon intensity, which measures the volume of carbon produced per unit of sale.

It is a measure that is simple, that can be comparable across asset classes and that results in two numbers that we can compare: one for the portfolio and one for the benchmark.

MP: So, why is it only a starting point then?

SL: For one, it’s only a snapshot in time. It can’t look forward into the decarbonization plans of the issuers. Secondly, it doesn’t capture the nuances of carbon accounting. Direct carbon emissions include what we call Scope 1, which are emissions that are intrinsically emitted by the operations of the company; Scope 2, which are emissions linked to the energy use from the issuer; and Scope 3, which are indirect carbon emissions, be it from the supply chain or arising from product use.

And then finally, those carbon metrics don’t account for ESG structures such as green bonds. We think green bonds can be a very compelling way to finance the transitions for high-emitting industries such as utilities, for example.

MP: But it would seem that bond investors who want to support, then, the transition to a net-zero carbon economy should really gain a deeper understanding of: A, the direction of their portfolio emissions; and B, of the underlying decarbonization plans of the issuer for the future.

SL: That’s right. As sustainable bond investors, it is very important for us to focus on those issuers that have demonstrable and compelling plans to decarbonize in line with a world that only warms by one and a half to two degrees Celsius by the end of the century.

MP: And how do you do that?

SL: Firstly, we measure the weighted average carbon intensity at portfolio and at benchmark level. Then we disaggregate this data to have visibility at issuer level. Are those, do those issuers have plans to decarbonize in line with a world that only warms up by one and a half degrees Celsius by the end of the century? Are they enabling this transition through issuing green bonds and such structure?

SL: We then roll up the data into an overall number for both the portfolio and the benchmark. This allows us to have a much more comprehensive picture of the makeup of our portfolio. If you look at our sustainable portfolio, the carbon footprint is two-thirds that of the benchmark, and a much higher proportion of that footprint comes from those issuers with compelling decarbonization plans and that have issued green bonds to enable that transition.

MP: So it looks to me that while moving towards a net-zero carbon economy is a huge task, it’s also still a developing topic—looking at the data, the signs and all the information that is available to us.

SL: That’s right. It is a space that is fast evolving. More data is becoming available to us. The methodologies are being enhanced all the time. And as sustainable bond investors, it is very important for us to stay at the forefront of these developments, and to be able to portray our portfolio and our benchmark in the most accurate light in terms of their carbon characteristics and carbon footprint.

MP: Thank you very much for sharing your valuable insights with me today.

SL: My pleasure.