The Invesco Environmental Climate Opportunities (ECO) Bond Fund1 is our first fund with a dual objective:
Achieving these objectives is challenging. It requires carefully considered judgements regarding the suitability of a company from a climate perspective, as well as an assessment of its credit risk.
The value of investments and any income will fluctuate (this may partly be the result of exchange-rate fluctuations) and investors may not get back the full amount invested.
Invesco Environmental Climate Opportunities Bond Fund
Debt instruments are exposed to credit risk which is the ability of the borrower to repay the interest and capital on the redemption date.
Changes in interest rates will result in fluctuations in the value of the fund.
The fund uses derivatives (complex instruments) for investment purposes, which may result in the Fund being significantly leveraged and may result in large fluctuations in the value of the fund.
Investments in debt instruments which are of lower credit quality may result in large fluctuations in the value of the Fund.
The fund may invest in distressed securities which carry a significant risk of capital loss.
The fund may invest in contingent convertible bonds which may result in significant risk of capital loss based on certain trigger events.
The fund may invest in a dynamic way across assets/asset classes, which may result in periodic changes in the risk profile, underperformance and/or higher transaction costs.
As a portion of the Fund may be exposed to less developed countries, you should be prepared to accept large fluctuations in the value of the Fund.
The Fund intends to invest in securities of issuers that manage their Environmental, Social and Governance (ESG) exposures better relative to their peers. This may affect the Fund’s exposure to certain issuers and cause the Fund to forego certain investment opportunities. The Fund may perform differently to other funds, including underperforming other funds that do not seek to invest in securities of issuers based on their ESG ratings.
One of the key characteristics of the fund is the breadth of the opportunity set. We believe that it is important to look beyond simple low carbon or ‘carbon avoidance’ strategies. Instead, we are comfortable investing in companies with strong climate characteristics, even in carbon intensive sectors.
Not only does this add flexibility, but we also think it’s the best way of supporting the transition to a low carbon economy. Moreover, the fund has a broader scope than pure ‘green bond’ approaches. We did not want to be restricted to buying ‘labelled’ bonds and wanted to form our own judgements about the climate credentials of different companies.
Although the fund has an extensive and diversified remit, it also has a number of important climate themes that distinguish it from non-climate-oriented funds.
Let’s explore these in more detail.
The most prominent theme is green energy which is currently at the heart of the transition story. Electricity production has been a hugely carbon intensive activity, historically reliant on burning fossil fuels, and only supplemented to a modest extent by hydro and nuclear power. Now, following rapid advances in technology and much cheaper costs, solar and wind power generation is rapidly expanding.
Nonetheless, the scale of the challenge ahead is enormous. The International Energy Agency has estimated that spending on clean energy needs to triple by 2030 in order to avoid exceeding global sustainability goals2.
Luckily, we believe the sector currently offers opportunities from a financial perspective. Yields, whilst not especially high at the moment, are at least relatively appealing with potential opportunities amongst some junior securities.
One such example is Iberdrola, a world leader in renewable energy. The company has very ambitious plans to double its renewable capacity by 2030 and has a wide range of wind and solar projects across Europe and beyond. One of its largest projects is a wind farm in the North Sea which, when complete, should provide enough power for 2.7m homes.
It’s not only power generation companies that the Invesco ECO Bond Fund is financing. Upgrading and expanding the electricity transmission and distribution networks pivotal to the delivery of new sources of green power is also key. This is exemplified by TenneT, an electricity grid operator in the Netherlands and Germany. TenneT plans significant upgrades to its existing infrastructure as well as new networks to connect Dutch offshore wind farms to the grid.
Due to the central role of green energy and utilities in the transition to a low carbon economy, as well as the relative attractiveness of yields, this theme currently accounts for 25% of the SICAV fund (see figure 1 below).
Source: Invesco, 31 December 2021. Please consult the Prospectus for full information on the investment policy.
Another notable climate theme is the shift to electric vehicles. The transport industry is currently a big polluter which needs to change:
Although in its infancy, the shift to electric vehicles is now underway as traditional car manufacturers expand their ranges of hybrid and fully electric vehicles. More ambitious traditional car manufacturers are aiming to shift half their global production to electric vehicles by 2030, whilst some smaller volume manufacturers have pledged to go further.
In addition to ending tailpipe emissions, auto makers will also need to reduce their own manufacturing carbon footprint. Indeed, this is a challenging task as the production of an electric vehicle is typically a more carbon intensive process than that of a traditional combustion-engine vehicle.
Fund managers can determine which automakers compare favourably with their peers when it comes to electric vehicle production by looking at the following three areas:
The auto sector constituted 7% of the SICAV fund as of 31 December 2021.
The other key area to highlight is the banking sector. Not only is this the largest sector within global corporate bond markets, it’s a challenging theme for a climate investor. Banks’ importance to climate change is not related to their own emissions which are relatively light, but rather tied to the emissions that they finance.
It is difficult to compare the carbon intensity of banks’ lending portfolios as data is sparse and banks don’t report in a way that allows for direct comparison. We consider banks’ Scope 3 emissions, which are the result of activities from assets not owned or controlled by the reporting organisation but nonetheless appear in its value chain, to be little more than guesswork.
Instead, we have devised an alternative approach which sources a number of different qualitative assessments from third parties, in conjunction with our own climate research.
We could have simply chosen to avoid the carbon issue in this sector by focusing on the retail banks that do not provide finance and advisory service to heavy industry. However, we believe that it is better to include banks that, despite funding carbon intensive industries, have clear policies and ambition to reduce their support to fossil fuels, whilst increasing their green lending. Holdings in the finance industry constituted 19.5% of the SICAV fund as of 31 December 2021 (see figure 1 above).
Other themes will develop over time, as either financial opportunities present themselves, or as sectors develop their own pathway towards net zero emissions.
Overall, managing the Invesco ECO Bond Fund is a challenging yet rewarding endeavour. Just as many people can see the environmental benefits of switching from combustion engines to electric vehicles and insulating their homes, we believe that investors will be interested in ‘greening’ their financial portfolios.
Monthly fixed income update
June saw a resurgence in political risks with a snap election called in France, the upcoming general election for the UK, and the first televised debate between Trump and Biden ahead of the presidential election in the US. Read our latest thoughts on how fixed income markets performed during the month and what we think you should be looking out for in the near term.
The case for municipal bonds
US municipal bonds are worth considering for European investors portfolios as they may provide a source of diversification and for their relative value compared to Euro corporate bonds.
Yields maintain record highs and offer positive relative value
Invesco’s bank loans, direct lending and distressed credit teams to share their views as the second quarter of 2024 wraps up.
1 https://www.ft.com/content/644e392b-21de-47f3-accd-0e50be703520
2 Cars, planes, trains: where do CO2 emissions from transport come from? - Our World in Data: https://ourworldindata.org/co2-emissions-from-transport
Data as at 31.12.2021, unless otherwise stated. This is marketing material and not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication.
Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice. For more information on our funds and the relevant risks, please refer to the share class-specific Key Investor Information Documents (available in local language), the Annual or Interim Reports, the Prospectus, and constituent documents, available from www.invesco.eu. A summary of investor rights for the SICAV is available in English from www.invescomanagementcompany.lu. The management company may terminate marketing arrangements. This is not an invitation to subscribe for shares in the fund and is by way of information only, it should not be considered financial advice. This does not constitute an offer or solicitation by anyone in any jurisdiction in which such an offer is not authorised or to any person to whom it is unlawful to make such an offer or solicitation. Persons interested in acquiring the SICAV fund should inform themselves as to (i) the legal requirements in the countries of their nationality, residence, ordinary residence or domicile; (ii) any foreign exchange controls and (iii) any relevant tax consequences. As with all investments, there are associated risks. This communication is by way of information only. Asset management services are provided by Invesco in accordance with appropriate local legislation and regulations. The SICAV fund is available only in jurisdictions where its promotion and sale is permitted. Not all share classes of the SICAV fund may be available for public sale in all jurisdictions and not all share classes are the same nor do they necessarily suit every investor. Fee structure and minimum investment levels may vary dependent on share class chosen. Please check the most recent version of the fund prospectus in relation to the criteria for the individual share classes and contact your local Invesco office for full details of the fund registration status in your jurisdiction.
Any investment decision should take into account all the characteristics of the fund as described in the legal documents. For sustainability related aspects of the SICAV, please refer to https://www.invescomanagementcompany.lu.
