What are US high yield bonds low carbon?

External ratings agencies assign credit ratings to companies and governments issuing bonds based on an assessment of their creditworthiness. This rating can help to indicate the issuer’s likely ability to pay interest and return the initial invested capital as scheduled.

A high credit rating is considered ‘investment grade’ while a low credit rating may be considered ‘high yield’. High yield bonds are more volatile with higher default risk among underlying issuers versus investment grade bonds. Issuers with low credit ratings need to pay higher interest as incentive to purchase their bonds. As with most investments, higher potential risks demand higher potential rewards to compensate. The high yield bond market was born in the US and that remains the largest and most liquid market.

A low-carbon approach to investing in US high yield bonds is one that would seek a portfolio carbon footprint lower than the broader US high yield market.

One way to reduce a high yield portfolio’s carbon footprint is to exclude certain carbon-intensive sectors such as mining or such sub-sectors within energy.

It is also possible to use carbon intensity scores to select individual bonds across other sectors which will make a lower contribution to the overall portfolio carbon footprint.

Carbon intensity refers to the amount of carbon dioxide equivalent released into the atmosphere as a result of the activities of a company and its direct suppliers. External providers such as Trucost (part of S&P Global), provide a broad set of standardised environmental data on a wide range of listed companies. Carbon intensity scores from such providers may be based on data and analysis relating to factors such as contribution to climate change, water use, waste disposal, fossil fuel exposure, land, water & air pollution, and the over-exploitation of natural resources.

Why consider investing in 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 US High Yield Bonds Low Carbon strategy

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.

US high yield bonds low carbon strategy

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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.

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    Due to its simplification, this document is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this document is provided based on our state of knowledge at the time of creation of this document. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision.