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Exclusion can be a blunt tool when it comes to CO2 emissions, says Fidelity



Ana Victoria Quaas, investment director at Fidelity, argues that it’s a mistake to exclude bonds or equities based on overly simplistic screenings, such as emissions by revenue. Photo credit: Fidelity International

Ana Victoria Quaas, investment director at Fidelity, argues that it’s a mistake to exclude bonds or equities based on overly simplistic screenings, such as emissions by revenue. Photo credit: Fidelity International

Simply screening out high emitting companies is short-sighted and misses the opportunity to help firms decarbonise, according to Ana Victoria Quaas, investment director at Fidelity in Amsterdam.

“Climate change is the number one issue, probably, at this point in time,” Quaas told Delano in an interview. Quaas was speaking about Fidelity’s Sustainable Reduced Carbon Bond Fund, which funnels capital to companies “who are focused on transitioning”, and the Sustainable Climate Solutions Fund, which invests in firms rolling out CO2-reducing technologies. Several studies peg the amount of global investment needed to reach net-zero at more than $100trn. While some of this funding will come from the equities side, “the majority of capital is actually coming from the debt markets.”

Thus Fidelity’s bond fund, which launched in the first quarter of 2020. “Where we came from, in terms of the strategy, was to say, ‘actually, the entire world needs to decarbonise in order to get us to our goals,” Quaas explained. The aim of the fund is “to provide capital to those who are leading in terms of their climate approach now and raising the bar for the rest within their own sector.”

Risk of excluding too many companies

As for “the question around, ‘why don’t we just exclude’, well, because the whole world needs to transition.” Quaas cited the most recent MSCI Net-Zero Tracker, published in October. MSCI, an index and ratings outfit, screened 9,000 listed companies around the world and found that only 10% of them had aligned with the Paris agreement target of keeping the Earth’s “temperature increase to below 1.5°C.” Less than half (43%) set a goal of limiting temperature rises to below 2°C. Perhaps more surprisingly, MSCI stated that “a majority of listed companies (57%) do not align with any globally agreed temperature target.”

Quaas reckoned that filtering out all these firms would mean “you’re excluding a quite significant amount of companies”. Screening out high emitters “would be excluding mining, steel, energy companies, potentially a fair few utility companies, which are actually quite critical components within the sort of wider economy. If you’re looking at it on a sector basis, I think you get into the discussion of what metrics do you use to essentially exclude? Carbon data is still in a quite nascent sort of stage in terms of its development. A quite common metric is to look at it on a emissions by revenue basis. But if you take a very basic kind of screen, just that as a metric, what you are not taking into account is [that] you can have accounting differences, you can have different business mixes,” which can skew sector-peer comparisons.

Like-for-like comparisons

Fidelity analysts crunch the numbers to strip out these variations and come up with like-for-like rankings within sectors and sub-sectors, said Quaas. “It’s a global corporate bond fund” that is geographically and sectorially “well diversified”, she posited. “So it can be looking at anything. For example, the real estate sector, because buildings are quite significant in terms of carbon emissions. And what needs to take place in terms of renovation, in order to get those emissions down, is quite significant.” That said, “we don’t significantly over or underweight any particular sector. It’s really looking within the best in class within each one of those.”

While the bond fund focusses on financing companies’ climate transition, the equity fund--which launched over the summer--targets “nascent technology”. Sticking with the real estate sector example, the bond fund might finance property upgrades, while the equity fund could back a firm that has a nifty new building material with which to do it. Quaas said that Fidelity had no plans to introduce further funds using this approach at the moment.

Broad appeal

The bond fund is suitable for a wide range of institutional and retail investors, she stated. The bond fund’s generalist approach could appeal to a wide range of investors wishing to maintain a diversified portfolio without jumping into niche products, in her view. “The concept of green bonds is a very good one,” and the segment is growing, “but it’s still, on a relative basis, fairly small.”

Quaas said: “I think the important part of the fund’s approach is not trying to narrow your universe so significantly, either through specific sort of instruments such as green bonds, or through just focusing on portfolio emissions and excluding particular sectors, but really [targeting] overall transition and real world carbon emissions impact.”

This article was published in the Delano finance newsletter. For the latest Luxembourg financial sector news, analysis and events, sign up here.