Introducing the Invesco Net Zero Global Investment Grade Corporate Bond Fund

ESG continues to evolve dramatically. 

Those who lead will thrive and those who lag will struggle to survive.
 
We want to make sure we are there to help drive real-world change.

We believe the launch of this product will provide a solution to help meet our clients’ demands.

How are ESG considerations increasing in the fixed income space?

ESG continues to evolve dramatically and actually trend in importance, especially over the last couple of years. Now, this has been on the back of both, let’s say, client demand for greater sustainability products in terms of what they’re investing in, as well as a regulatory drive. For example, within the EU, SFDR disclosure requirements have led to a strong shift of capital towards funds which have a strong ESG tilt.

How are you responding to this increased demand?

As investors, our response is not simply to integrate, be aware of, or even just exclude, let’s say, problem names or problem sectors. More broadly, we want to make sure we are there to help drive, say, real-world change towards a sustainable economy by strengthening our stewardship and engaging further with the companies we invest in.

Furthermore, with the growth of sustainable bond issuance from issuers, be it in terms of green, social or sustainable-linked bonds, our approach to investing continues to evolve. For example, we’ve developed a framework to evaluate what we buy to reduce the risk of greenwashing, as well as creating our own proprietary ESG scores for what we invest in, rather than relying on, let’s say, third-party vendor sources, which might be limited by data or timeliness issues.

Why are you launching a net zero Article 9 fund?

Well, there are three reasons. The first is the market opportunity. At the end of last year, according to Morningstar, Article 9 funds only accounted for 4% of the funds they review, hence there is, in our view, a clear shortage of funds that have a sustainable objective.

The second reason is from a demand-side perspective. Now, specifically within net zero, we have seen a significant rise amongst asset owners – i.e. pension funds or insurers who are making net zero commitments. In fact, over 60 signatories with over $10 trillion worth of assets are looking to commit to products with a net zero focus. So we believe the launch of this product will provide a solution to help meet our clients’ demands.

And the last point is really the strength of our capabilities within credit. Now, we’ve chosen to launch our first net zero offering in the global credit asset class. The reason why is because, to tackle emissions in a meaningful way, we have to start by looking at large IG-rated companies worldwide, as they are responsible for the lion’s share of global corporate emissions. Furthermore, this will also leverage our strong global credit business, where the strength of our investment platform and our client-centric focus has continued to see strong asset growth and performance.

What does the new fund look to achieve?

So the aim is really to encourage companies to commit to the goal of achieving net zero and then to ensure that they follow through year on year by reducing their emissions in line with science-based targets. This means effectively investing in issuers of corporate debt whose goals are consistent with those set by the Paris agreement of reaching net zero emissions by 2050.

How will the fund look to achieve this aim?

So how do we do this? Well, here we look at a number of components, but three to highlight are transition, engagement and climate solutions. In terms of the first point, ‘transition’, the corporates that we invest in will need to be on a credible path of decarbonisation, which includes investing in high-emitting sectors like energy. Simply excluding or starving the sector of capital, is, in our view, rather short-sighted, because the world still needs these companies by 2050. In addition, we cannot simply invest in issuers that look optically good because they belongs to a low-carbon-emitting sector and say that we’re transitioning to a net zero world. We need to make sure that we also are inclusive and focus on those names in high-emitting sectors as well.

The second is engagement. Now, to enable us to drive progress towards net zero, we have to, one, set targets which are measurable, and, two, have a credible stick to ensure action, with divestment as a last resort. Now, like our clients with sustainable objectives, we cannot just simply take a company’s word for it.

The third is climate solutions. Now, this is probably the most difficult of the three to achieve. If we think about transitioning to a net zero world, the easiest part is to reduce emissions, which gets us around 80% or 90% of the way there, but the remaining 10% or 20% requires actually removing carbon from the atmosphere or storing it permanently, and that doesn’t just mean planting trees. Moreover, it means looking to invest in negative emission solutions where a technology might not exist yet.

What is the fund’s underlying philosophy?

So there are three aspects that we focus on. The first is differentiation. Now, we believe that there’s differentiation in terms of the pace of transitioning amongst corporates towards a net zero economy. That is, corporates who are on a viable path will outperform the laggards who will be left behind, i.e. those who lead will thrive and those who lag will struggle to survive.

The second aspect is diversification. Now, we need to be careful as investors to not fall into the trap of, let’s say, categorising companies as just black or white, green or brown, good or bad, as they transition. Otherwise it creates a very much flawed approach into just investing in low-carbon corporates, which not only narrows the investable universe but fails to encourage real-world change. Therefore, a diversified approach means investing in high emitters which might not be aligned to net zero on day one, but which we believe will take the required action to do so, as well as investing in those, let’s say, low emitters that are, in our view, insulated from climate risk and which can also improve the portfolio’s resilience to shocks.

Now, the last point to mention is dynamism. What we mean by that is that we cannot simply work in isolation. Net zero is only successful if we collaborate, not only internally but also externally. For example, partnering with our clients to understand their net zero criteria and goals, which might actually be more stringent, and also engaging with companies to ensure that they progress to net zero, and, finally, leading the efforts and working with other asset managers to drive this real-world change.