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CLIMATE TRANSITION: INVESTING FOR CHANGE

RICK

Since the dawn of humanity societies have endured major transitions. But the current climate transition is our greatest test ever.

JANE

To avert an existential threat and keep heating within 1.5 degrees, greenhouse gas emissions must decline by 50% each decade to reach net zero by 2050.

RICK

The scale and pace of change needed to achieve this is unprecedented and will impact on every company around the globe.

NAYEEM:

Climate change represents the largest long-term systemic risk in client portfolios today. Even companies that appear to have a small carbon footprint are at risk.

JANE

Banks for example are exposed to climate risks in their loan books. This information currently doesn’t show in their reported carbon emissions data.

NAYEEM

Ruling out high carbon emitters in the portfolio or investing only in companies that provide climate solutions such as renewable energy or electric vehicles will not deliver this transition alone.

RICH

ALL companies have a role to play in the transition to a lower carbon world.

JANE

Investing in the climate transition requires a good understanding of climate risks between and within sectors.

JANE

For example, the utilities sector faces higher decarbonisation risk than healthcare. But within utilities, water companies face higher physical risks from water scarcity whilst electricity generators are exposed to greater carbon regulatory risk.

NAYEEM

Understanding how businesses are managing transition risks and developing climate resilience across their value chain can help identify “transition-ready” companies.

JANE

For example, we are already seeing extreme weather impacting companies, from droughts in Europe disrupting power supply to floods preventing key components getting to market. Assessing and managing these risks will give a competitive advantage to companies.

RICK

Investment approaches that rely solely on carbon emissions data to identify low-emitting companies tend to focus only on operational emissions: Scope 1 and 2. As such, they are missing a big contributor to the global greenhouse emissions in their data.

Scope 3, or indirect emissions across a company’s value chain, cannot be ignored.

JANE

In contrast, by setting Science-Based Targets or SBTs – companies aligning emissions with a 1.5 degree future will also put pressure on emission reduction throughout their value chain to deliver this ambition.

NAYEEM

SBTs specify by how much and how quickly they need to reduce their greenhouse gas emissions, which is a more effective way of magnifying positive change beyond the investee company.

JANE

Companies that set SBTs may see increased innovation, reduced regulatory uncertainty, improved investor confidence and better profitability and competitiveness.

NAYEEM:

Crucially, a focus on both transition-ready and climate solutions’ companies broadens the opportunity set and diversifies portfolio risks.

JANE

This can help investors meet their needs for long-term sustainable returns whilst accelerating the transition to a lower carbon world.

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Investing in the climate transition

The scale and urgency of change needed to ensure global greenhouse gas emissions are aligned with a 1.5 degrees Celsius pathway will impact every part of the global economy.

Our Core Plus Climate Transition Fund invests in debt securities of companies driving fundamental changes toward a sustainable future. We invest with a dual objective, which we believe are equally important and positively aligned to deliver:

Long-term capital growth

To support the transition to a lower carbon world

Investment opportunities in the strategy are linked to the following investment themes and aligned with the principles of the following United Nations Sustainable Development Goals:

Affordable and clean energy

Climate action

Our approach

We look beyond company emissions to identify the winners from the transition across a broad range of sectors. First, we exclude more carbon-intensive fossil fuel companies. We then invest in debt securities of companies either mitigating or adapting to climate change or are transition- oriented, while leveraging our scale and influence to engage with portfolio companies. This approach can lead to the following investor benefits: profitable growth, resilience across market cycles and influencing positive outcomes.

Portfolio construction

In addition to the more traditional forms of alpha, in fixed income, we harness portfolio construction as a separate and unique alpha source. The benefit of this is an ability to accept and work with meaningful investment constraints while broadly preserving the risk/reward relative to unconstrained strategies. This alpha source also allows us to create a portfolio that better balances returns across various market outcomes in a manner that does not involve substantial tradeoffs. The leveraging of this alpha source is especially useful alongside our proprietary climate model that covers a broad range of industries and seeks to reduce decarbonization and physical climate risks embedded in value chains. This approach provides us with greater certainty while concurrently delivering on both investment and climate objectives.

Back transition

The journey to net zero presents risks and opportunities across all sectors. Our focus on solutions and transition themes allows us to identify companies whose services and products deliver tangible climate outcomes. It also helps maximise the strategy’s opportunity set and potential to deliver consistent, long-term outperformance. 

Leaders in stewardship and engagement

Portfolio holdings are targeted with two timebound engagement asks: Science-based targets and CDP disclosures. We also actively engage with governments, policymakers, NGOs, academics and other key influencers to correct material market failures.

Aviva Investors Canadian Core Plus Climate Transition: Strategy in brief

PDF 3.8 MB 10 pages

The strategy has limited exposure to carbon-intense fossil fuels and invests in debt securities of a broad range of companies across sectors that are best positioned to benefit from the transition to a low-carbon world.

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Key risks

Fixed income investments have a reputation for safety but are not without risks. The risks below are illustrative. Other risks also exist. For further information, please contact our investment team.

Investment risk

The value of an investment and any income from it can go down as well as up and can fluctuate in response to market moves. Investors may not get back the original amount invested.

Credit and interest rate risk

Bond values are affected by changes in interest rates and the bond issuer’s creditworthiness. Bonds that offer the potential for a higher income typically have a greater risk of default. 

Derivatives risk

Investments can be made in derivatives for hedging purposes only, which can be complex and highly volatile. Derivatives may not perform as expected, meaning significant losses may be incurred. 

Liquid securities risk

Some investments could be hard to value or to sell at a desired time, or at a price considered to be fair (especially in large quantities). As a result their prices can be volatile. 

Sustainability risk

The level of sustainability risk may fluctuate depending on which investment opportunities the Investment Manager identifies. This means that the fund is exposed to Sustainability Risk which may impact the value of investments over the long term.

Core Plus Climate Transition team

  • Sunil Shah

    Head of Canadian Fixed Income & Senior Portfolio Manager

  • Nayeem Islam

    Portfolio Manager

  • Jane Xie

    Portfolio Manager

  • Trevor Li

    Portfolio Manager

  • Manpreet Sandhu

    ESG Analyst

    • Aviva Investors Climate Change Views

    Disclaimer: These views are authored by various individuals within Aviva Investors.

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