Schemes urged to act now to save net-zero transition costs

UK pension schemes should act now on climate change by taking advantage on good prices for the integration of climate factors into their portfolios, according to AXA IM.

The firm explained that it was “potentially one of the cheapest times” for climate factor integration for pension schemes, noting that the divergence in credit spreads between lower-and higher-rated bond issuers was “at its lowest point in the post-Global Financial Crisis era”.

It added that the same lack of dispersion held between climate leaders and climate laggards, with no premium to pay for investing in lower emitting or more climate-aligned bonds.

AXA IM solutions strategist, Bruno Bamberger argued that more investment opportunities could emerge if regulation and investor sentiment created more market dispersal, such as a range of returns between bonds issued by progressive company management teams that benefit from the net-zero transition and the low returns from climate “laggards”.

He added that this latter group could end up experiencing downgrades and defaults due to their cost of borrowing rising amid their “lack of preparedness in the run up to net zero”.

Bamberger continued: “We are calling on pension schemes of all sizes to act now. The current window of opportunity allows a chance to lock more climate resilience into portfolios, with increased allocations to bond issuers that are prepared for a changing world, and lower allocations to those that are not.

“It’s reasonable to expect any asset owners taking this path to experience more predictable income streams, from companies facing less disruption in future – and reduced risk of downgrades and defaults from climate related exposures.”

Additionally, he branded the growing issuance of green, social and sustainability bonds as “a significant opportunity”, which would offer long-term asset owners the chance to “green their portfolios without incurring trading costs”.

Bamberger said: “Climate change is rarely out of the news, and in these last few weeks alone we have seen extreme weather catastrophically affecting human life, alongside business operations in China, central Europe and North America.

“Regulators are acting as quickly as they can with more rules requiring key actors, including pension schemes, to publish more data, enabling markets, investors and consumers to make more informed choices to ensure progress towards a sustainable world.”

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