fixed income
Cooling high-carbon sectors with corporate bonds
Investing in companies that are already low-carbon today does nothing to lower emissions in the future. That’s why we invest in transitioning companies with credible plans to decarbonise. How do we assess companies for their climate alignment to see if they make the cut for our TargetNetZero credit strategy?
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Investing in ice cubes to cool high-emitting sectors
While there is general agreement on the goals of net-zero greenhouse-gas emissions set out by the Paris Accord, there is far less consensus on which companies in high-carbon sectors will get there. What differentiates some companies from others in terms of how they foresee achieving net-zero emissions in future?
We consider two companies that our analysis identifies as being ‘ice cubes’. These are companies in high-emitting sectors that are vital to economic activity and where cuts in emissions are most needed to reach a net-zero future. Crucially, although ice cubes may have high carbon footprints today, they also have credible plans and targets to decarbonise that are aligned with the Paris Agreement. We call these companies ice cubes as they contribute significantly to cooling the economy. On the other hand, we call ‘burning logs’ the companies that our analysis defines as being high emitters with insufficient plans to decarbonise.
Investing in ice cubes helps contribute to economy-wide decarbonisation, reduces the concentration risk arising from exclusively investing in low-carbon companies and is crucial to reaching net-zero goals.
A forward-looking temperature score
To identify ice cubes, we apply our in-house implied temperature rise (ITR) methodology to assign them a forward-looking temperature score. This measures how effective they will be in cooling their sectors, and the economy more broadly in future – and whether they will keep to the below 2.0°C warming threshold set by the Paris Agreement.
When building our TargetNetZero investment-grade credit strategy, we prioritise ice cubes because we believe these companies are key to driving the transition and decarbonising the future. It’s impossible to build a full portfolio of ice cubes, however, as there are not enough in the universe. Our approach prioritises those companies that fulfil our criteria for meeting the goals of the Paris Agreement at the expense of burning logs who we see facing additional climate risk.
There is little difference between the spreads of ice cubes and burning logs at present, although we believe this will change over time. Ice cubes could, therefore, represent strong investment potential for investors who recognise that investing in transitioning companies is the best way to reduce real emissions in future and take advantage of attractive valuations.
Case studies2
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Eni
Eni is a global leader in producing oil and gas, and a major refiner and transporter of oil and gas products in Europe. It has a credit rating of A-3 and operating sites in approximately 70 countries.
It is estimated that the oil and gas sector is responsible, directly or indirectly, for 42% of global carbon emissions4. Therefore, the decarbonisation of energy companies is critical. However, this is a hard-to-abate sector and, thus, features many burning logs: few companies are on a Paris-aligned temperature trajectory.
Using our temperature-alignment metric, ITR, we estimate Eni’s temperature score at 2.0°C, and in line with Paris Agreement goals. Eni’s score is also much lower than the oil and gas sector’s average score of 4.0°C5, which means Eni outperforms its sector in terms of climate-alignment.
Reducing all scope emissions
The temperature score reflects a number of targets announced by the company to reduce its scope 1, 2 and 3 emissions.6 All scope emissions are notoriously difficult to measure. Eni is among the few companies in any sector that has targets for all scopes and was one of the first companies to report emissions for all scopes starting in 2011, giving us an initial amount of confidence that the firm takes its sustainability targets seriously.
To meet its objective to be net zero across all scopes by 2050, Eni is committed to reducing its emissions, compared to a 2018 base-year, by:
- 32% by 2030
- 51% by 2035
- 73% by 2040
Improving operations for the transition
To reach its energy-transition goals, Eni focuses on both improving existing operations, as well as committing substantial capital expenditure to cleaner fuels. Specifically:
- Thanks to these projects, routine flaring has been reduced by about 35% from 2014 to 20227
- Fugitive emissions are decreasing thanks to leak detection and repair campaigns implemented periodically, with a reduction of emissions of about 50 ktCO2 eq. compared to 20218
- It is incorporating carbon capture and storage (CCS) facilities in many operating sites, although it is too early to determine impact. Storage sites are being built in already depleted gas reservoirs and existing infrastructure, meaning the amount of stranded assets will reduce over time
- Eni’s impressive internal scope 3 emissions forecasts support other sectors. For instance, it installed 13,000 electric vehicle charging points in Italy and Europe as of end-2022, achieving its 2022 target of more than 2GW of installed capacity9
In total, Eni has committed to spending EUR 13.8 billion between 2023 to 2026 on reducing its scope 1, 2 and 3 emissions10, and we expect it will continue spending a similar or greater amount going forward.
Overall, we see Eni’s ITR and company actions as being aligned with the 2.0°C temperature outcome set by the Paris Agreement. Compared to its peer group, Eni remains committed to transitioning whereas other companies are less steadfast and have somewhat backtracked on their climate pledges, in our view.
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Stellantis
Stellantis is a global automaker and mobility provider that offers clean, connected, affordable and safe mobility solutions. The company was created by the merger of Italian-American conglomerate Fiat Chrysler Automobiles and the French Groupe PSA. Stellantis has a clearly mapped out software strategy to support its evolution into a sustainable mobility tech company.
The company is highly relevant to the climate transition because it has a higher carbon intensity than both the MSCI World index and the automobile sector. Stellantis’s carbon investment ratio is around 2100t CO₂e / MUSD invested, compared to around 1900t CO₂e / MUSD invested for the automobile GICS sector11
Our temperature metric assigned the company an ITR of 2.0°C. The temperature score reflects the targets announced by the company, which we believe identify it as a high-carbon transition leader. The company’s score is also lower than the average of the automobile sector of 3.4°C.
Ambitious targets via electrification
Stellantis plans to achieve net zero by pursuing its electrification strategy: offering more than 75 fully-electric models (or Battery Electric Vehicles (BEVs)) by 2030 and aiming for 100% of passenger car sales in Europe and 50% of passenger car and light-duty truck sales in the US to be BEVs by the end of the decade.
It is also leading the drive on hydrogen technology, delivering the first hydrogen fuel cell vans in Europe in late 2021. In 2024, production capacity for mid-size vans will be increased, with the aim to extend this technology to large vans and achieve the first US offering by 2025.12
Overall, we see Stellantis’s ITR and company actions as being aligned with the 2.0°C upper limit set by the Paris Agreement.
Temperature check
A forward-looking approach is necessary for investors to evaluate which companies are on track to reach the goals of the Paris Agreement. By looking at temperature scores, our analysis goes beyond a company’s high carbon footprint today and instead focuses on where its decarbonisation trajectory is heading tomorrow.
Identifying ice cubes helps investors focus on providing capital to companies driving the transition forward as they cool vital economic sectors where emission reductions are most required.
sources.
The case studies provided in this document are for illustrative purposes only and do not purport to be recommendation of an investment in, or a comprehensive statement of all of the factors or considerations which may be relevant to an investment in, the referenced securities. The case studies have been selected to illustrate the investment process undertaken by the Manager in respect of a certain type of investment, but may not be representative of the Fund's past or future portfolio of investments as a whole and it should be understood that the case studies of themselves will not be sufficient to give a clear and balanced view of the investment process undertaken by the Manager or of the composition of the investment portfolio of the Fund now or in the future.
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