We developed our climate investment framework five years ago, culminating in the launch of our strategy in June 2021. At the time, we believed it offered a unique proposition compared with other investment offerings. Given market drivers, our approach now seems more relevant than ever and is well-positioned to capture future investor demand.

In this article, we interview managers Samuel Grantham, and Thomas Leys on the milestones and successes of the strategy so far. 

What is it about your investment approach that makes this strategy unique? 

Samuel: Many climate products are overly focused on portfolio optics such as emission targets or labels like ‘green’ bonds. These approaches have their merits but can limit the most important objective – delivering real-world decarbonisation and adaptation in the global economy. 

Lower carbon funds, including those with Paris-aligned benchmarks, typically avoid exposure to higher-emitting sectors such as utilities, favouring supposed lower-emission sectors like financials. 
Our process is different. We identify the primary sources of emissions across critical sectors – energy, transport, materials, real estate, and industrials. We then pinpoint companies with ambitious and credible plans to slash those emissions. 

Thomas: Don’t get us wrong, green bond funds offer benefits to investors in the form of a clearly labelled instrument that can deliver positive climate impacts. However, not all green bonds are equal. For one thing, investors run the risk of greenwashing. Plus, investment characteristics may not fit all investor preferences.

We still invest in green bonds. However, we use our in-house green bond framework to ensure credibility and a clear alignment with our climate objective. A label can be a good indicator of climate credentials, but we research a company holistically – its evidence of ambition, credibility, delivery of avoided emissions and real-world climate adaptation. 

Climate adaptation is vital to the climate transition journey but is underrepresented in many products. Fixed Income has a key role given the broad set of investable instruments. We think adaptation will continue to grow as credible projects and funding are deployed in this space. 

Samuel: Even three years in, the strategy remains unique thanks to our forward-looking analysis. We don’t rely on backwards-looking external data or ESG labels to categorise our climate investments. 

Each name goes through a bottom-up, analyst-driven, climate-focused research process. This is tailored to our three climate pillars to ensure we assess the most material factors. 

How do you identify the right investment opportunities, aside from green bonds? 

Samuel: First, we help clients capture the climate opportunity by investing across investment-grade and high-yield bonds in developed and emerging markets. This includes up to 50% in emerging markets and up to 40% in high yield. This approach enables us to capture yield-enhancing market segments. It also means we can invest in companies at different stages of the climate transition journey and across the broadest spectrum of industries. 

Thomas: Second, as mentioned earlier, our strategy is more than a low-carbon or ‘green’ bond strategy. We support companies across industries to deliver the climate transition – focusing on ambitious businesses actively delivering real-world decarbonisation, driving industry change, disrupting sectors, pioneering new technologies, and meeting evolving customer demands.
We believe these ‘best-in-class’ companies are well-positioned to benefit from the growth in climate-focused investment and potentially outperform their peers. To do so, we identify investments across three pillars.

  • Leaders: 
    Investing in leading emissions reducers from high-emitting sectors. 
  • Solutions: 
    Supporting solution providers with products and services enabling decarbonisation in the wider economy. 
  • Adaptors: 
    Investing in those companies contributing to climate adaptation by helping societies adjust to the consequences of climate change. This includes green, municipal and sub-sovereign issuers using bond financing for climate-resilience projects. 
Thomas: These three pillars clearly show how we identify upside potential beyond green bonds. We focus on delivering climate impact, which can come from green or brown bonds (issuers raising capital to transition to greener business activities). This offers more growth potential and a broader opportunity set than 100% green bonds. 

What are you most proud of with the strategy? 

Samuel: The Climate Transition Bond strategy has a dual climate and return objective. After three years, we can show that the two are interlinked and can be achieved together without compromise. 

I can share some climate highlights so far: 

Our investments in bonds issued by companies under the Leaders and Solutions pillars have helped to mitigate the causes of climate change by financing decarbonisation activities. Here’s some of the cumulative impact of those companies over three years: 
  • Provided 40GW of renewables capacity – bringing the total renewable capacity of companies in our portfolio to over 200GW.  The combined capacity provided by the companies is capable powering 150 million households. 
  • Helped avoid tens of millions of tonnes of CO2 – through electric heating, cooling and transport provided by our companies.
  • Invested over $15 billion in energy efficient properties globally.
  • Helped enable billions of public transport journeys and produce hundreds of thousands of electric vehicles through low-carbon transport investments.
Also, companies held in the portfolio under the Adaptors pillars have financed climate resilience and adaption.  Highlights include:
  • Helping reduce wildfire risks by laying thousands of miles of underground power cables.
  • Helping reduce drought risk by saving billions of litres of water annually through improving infrastructure maintenance, water capture and irrigation. 
  • Mitigating collapsing ecosystems by committing to preserve hundreds of thousands of hectares of forests. 
  • Providing flood prevention solutions in three continents.
Thomas: The strategy launched in June 2021. It’s fair to say markets have been volatile over this period. This has highlighted the strengths of our approach. In 2022, against one of the worst periods on record for fixed-income assets, we significantly outperformed our benchmark, as well as global investment grade and green bond indices. In 2023, when markets recovered, the strategy participated in the rally, again outperforming its benchmark, global investment grade and green bond indices.

What’s your outlook for climate investing, given many market distractions away from sustainable investing? Are the assets overvalued?

Thomas: The growing global focus on environmental sustainability means the outlook is promising. However, we don't believe these assets will become overvalued solely due to rising demand. While there’s growing interest in climate-related investments, the opportunities within climate transition are vast and continuously evolving. 

Most importantly, our strategy has a dual objective of a positive climate impact and return. We combine extensive climate research with our analysts’ best investment ideas – those with the potential to deliver an attractive return.

Therefore, while we may find opportunities that are attractive from a climate perspective, we won’t invest if we think they are overvalued.  

Furthermore, the field of climate transition is dynamic, with ongoing advancements in technology, regulation, and consumer behaviour presenting new investment opportunities. We therefore think there’s ample room for growth and innovation, making it unlikely that these assets will become overvalued solely due to rising demand.

What are you hoping to achieve over the next three years? 

Samuel: We believe that after three years, we’ve proven we can deliver on our dual climate and return objectives. We’ll look to maintain this high bar. 

We think there’s great potential to deliver attractive total returns for our clients. Market dynamics of lower growth, an eventual central bank rate-cutting cycle, and good company fundamentals provide a favourable backdrop. 

From a climate perspective, we never stand still in terms of the scope of our research. We’ll continue working to unearth the best ideas across all industries. We’ve already seen significant progress from the companies in which we invest. Going forward, we’ll continue to seek out businesses with the greatest potential to deliver real-world decarbonisation and adaptation.