By only investing in the best of the best, sustainable investors are harming their interests, says Henrietta Pacquement, manager of the Wells Fargo Climate Transition Global Investment Grade Credit fund.
“If you take, for example, a Paris-Aligned Benchmark (PAB), which is quite restrictive, as a starting point, then it immediately becomes a lot harder to invest in companies that are now working to significantly reduce their emissions”, she says in conversation with Fondsnieuws, Investment Officer’s Dutch-language sister publication. “By only rewarding those companies that have already made the switch to sustainability, you achieve little in practice. We prefer to invest in the second category, i.e. to encourage listed companies that are moving in the right direction.”
That is why Pacquement and her fellow fund managers have opted for the less ambitious Climate Transition Benchmark (CTB), which involves a 30 per cent reduction in CO2 emissions, rather than the 50 per cent reduction envisaged by the PAB. For example, it allows investment in oil and gas companies. According to her, this is perfectly compatible with Wells Fargo’s desire to help accelerate the climate transition. “We deliberately choose not to exclude entire sectors or only to invest in the front runners. That way you limit your investment universe too much.”
Fracking and Shell included
The exclusions of the fund, which was set up at the beginning of this year with just under 2 billion euros from British pension fund NEST, which already converted this amount to Wells Fargo Asset Management, are therefore limited to 6.5% of the names in the Bloomberg Barclays Global Aggregate Corporate Index. “In addition to the usual exclusions such as controversial weapons and tobacco, these include coal producers and oil companies with production from tar sands, for example.”
Surprisingly enough, companies active in shale oil or gas are not included in the exclusions, even though it is difficult to argue that such polluting activities are compatible with the climate transition. Pacquement: “Fracking is indeed not a hard exclusion criterion. We assess each company individually on this point. Moreover, shale oil and gas make up only a very small part of the turnover of most IG-issuers. Fracking is mainly a business focused on the US market.”
“What we find particularly important is that companies make an effort in the energy transition and are serious about reducing their carbon footprint”, she says. According to her, a company like Shell falls into this category, despite the fact that it has been ordered by the courts to do more to meet its 2050 carbon neutrality target. “Shell has made progress in meeting their CO2 targets in a very difficult sector. We also want them to do more, but compared to ExxonMobil, for example, they are a lot further in reducing their CO2 emissions.”
At the end of June, the fund’s allocation to the energy sector was 6.2 per cent. Against 6.4 per cent for the index, with oil and gas making up 3.1 per cent of the strategy against 3.6 per cent for the index. The allocation to basic materials was 1.8 per cent, compared with 2.8 per cent, while there was no exposure to iron and steel or mining, the fund manager of the Wells Fargo Climate Transition Global Investment Grade Credit fund reveals. Pacquement adds that CO2 emissions per billion in sales are at least 30 percent lower than the benchmark, the Bloomberg Barclays Global Aggregate Corporate Index.
Green bonds
For now, the Climate Transition fund is only investing in green bonds on a limited basis, around 5-10% of the portfolio, according to Pacquement. Because green bonds are so popular with investors at the moment, there is often a substantial negative ‘greenium’, which means there is a limited spread compared to ordinary bonds of the same company. “You have to factor in this ‘greenium’ when selecting bonds, because you want to make sure that your investors are paid for the financial risk they are taking by investing in the company.”
Engagement
Up to now, climate engagement has mainly been a matter for equity investors. After all, they have voting rights at shareholders’ meetings where they can make themselves heard.
“The financial objectives between equity and bond investors can be different, said Pacquement. “Bond investors want their money back, shareholders look for the upside. If you look at what happened last year, one of the first markets that central banks looked to strengthen were the credit markets, to make sure that companies could get what they needed from a funding point of view. That illustrates that even as an investor in corporate bonds you can sit at the table and try to influence change.”
Yet the role of bond investors will become more important in the future, Pacquement expects. “Companies will need to continue to have access to the capital market. If they don’t tackle the climate transition with sufficient speed, this access will be compromised and they will have to pay higher interest rates.” The downgrading of the credit ratings of the oil sector at the beginning of this year is a warning sign in that respect, Pacquement believes. “Companies are being forced to raise their climate ambitions.”