US High Yield Bonds Low Carbon

In the current environment of persistently low interest rates, bond investors are finding attractive yield difficult to come by. For those in a position to take on higher levels of credit risk, high yield bonds may provide a significant yield enhancement to a well-diversified portfolio.

At the same time, many investors are looking for investment solutions that focus on more than just financial performance, as Environmental, Social and Governance (‘ESG’) issues rise-up the agenda. The 2015 Paris Climate Change Conference (COP21) triggered the transition to a low-carbon economy. Since then, a series of regulatory changes have taken place that have led to an increase in awareness of environmental issues. The result is that many investors are looking to align their portfolios with the transition to a low-carbon economy through ESG investing.

At AXA IM, we believe the global economy has entered a ‘decade of transition’ towards a more sustainable, de-carbonised model. During this transition, we think portfolios aiming to proactively reduce carbon intensity and look for low carbon investments will be better positioned to withstand non-financial risks and outperform the broad market. Carbon intensity is usually recognised as the most impactful metric to follow when focusing on the E portion of ESG. We believe it is a good way to evaluate what effort a company is making to try to minimize their carbon footprint.

Given the growing focus on ESG and climate change, a more environmentally conscious way to invest in the US high yield market could be a compelling proposition. Furthermore, we feel this is an opportune moment as carbon intensity scoring becomes more prevalent in the US high yield universe meaning the diversity of the opportunity set has increased versus a few years ago.

Our strategy aims to help clients meet both financial return and ESG objectives by investing across the broad US high yield market, while targeting a material reduction in the carbon footprint.

We adopt an exclusionary process which means we begin with constructing an investible universe by eliminating almost all the most carbon-intensive sectors. In addition, we manage carbon intensity and water intensity scores through our credit selection process within non-excluded sectors to avoid companies we view as excessively carbon intensive. As a fundamental credit manager, credit analysis remains the most important part of our process but we also believe ESG factors can be additive to performance as they provide an additional source of insight.

The strategy benefits from this combination through a well-resourced, experienced US high yield team, alongside access to AXA IM’s proprietary ESG quantitative and qualitative data and research.

The ESG data used in the investment process are based on ESG methodologies which rely in part on third party data, and in some cases are internally developed. They are subjective and may change over time. Despite several initiatives, the lack of harmonised definitions can make ESG criteria heterogeneous. As such, the different investment strategies that use ESG criteria and ESG reporting are difficult to compare with each other. Strategies that incorporate ESG criteria and those that incorporate sustainable development criteria may use ESG data that appear similar, but which should be distinguished because their calculation method may be different. Details of the methodology and its limits are available in the relevant fund prospectus.

No assurance can be given that our strategies will be successful. Investors can lose some or all of their capital invested. These strategies are subject to risks including market risk, liquidity risk and credit risk.