The Invesco Environmental Climate Opportunities (ECO) Bond Fund (UK)1 is our first fund with a dual objective:
- The fund has a financial objective, which is to provide income and growth.
- There is also an important non-financial objective, which is to support the transition to a low carbon economy.
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.
Flexible and diversified
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.
Sparking the green energy transition
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).