Sustainability Pathways

A monthly newsletter

Welcome to ISSUE 6 of Sustainability Pathways

With much of Europe baking in record temperatures, we look this month at the European Central Bank (ECB)’s efforts to decarbonize its fixed-income portfolio.

Asset owners are considering the impact of their own corporate bond investments in terms of sustainability and financial performance. A look at the volatile year of 2022 revealed that climate-aligned bond indexes performed in line with the broader market.

Read on for more insights and useful tools for your portfolio.

Tilting towards net zero: Decarbonizing corporate bond portfolios

The ECB’s first climate-related financial disclosures, published in March, detailed how the bank is integrating climate considerations across its investment and risk management operations.

To reduce systemic climate-related financial risks, the ECB began “tilting” its corporate bond portfolio towards issuers with higher climate scores in October 2022. That led to a 65% decrease in the carbon intensity of its corporate bond purchases in Q4 compared with the full year.

“Companies in our portfolio have lowered their emissions for every million euro of revenue they earn,” the ECB said.

Climate Corporate-Bond Index track record

Source: MSCI, cumulative excess return of each investment-grade climate corporate-bond index as compared to its parent index from Jan. 1, 2022, to Jan. 31, 2023.

While the ECB has resources to maintain proprietary climate scores for all eligible issuers, many asset owners are looking for an index-based approach to integrate climate considerations, or a climate tilt, into their benchmark.

Even within passive portfolios, asset owners need corporate-bond indexes that meet their climate risk management needs without sacrificing financial returns.

MSCI researchers tested the resilience of climate-aligned corporate bond indexes when windfall profits for the energy sector led equity climate indexes to underperform the broader market from January 2022 to January 2023. Despite underweighting high-emitting sectors that tend to perform well in environments of spiking energy prices and heightened market turbulence which marked 2022, our climate-index returns were in line with their broader-market parents. Several even outperformed. Read the full report here.

MSCI’s climate corporate bond indexes provide a customizable solution designed to help asset owners meet a range of risk management and investment objectives, including:

On demand event: Demystifying Liquidity Risk

MSCI’s Liquidity Metrics is an advanced multi-asset-class risk framework that is designed to help asset owners with regulatory reporting and stress testing of portfolio liquidity under adverse market scenarios. Learn about its capabilities in this webinar.

How do asset owners find value in their transition?

Karoliina Lindroos, Head of Responsible Investment at Ilmarinen, discusses the role of climate indexes in the road to net-zero.

Climate and Sovereign Bonds

See how the MSCI Climate Change and Natural Hazards Risk Factor Score can help asset owners analyze and manage physical and transition risks for 198 countries rated under MSCI’s ESG Government Ratings.