Focus on: Low-Carbon-Bonds


With low-carbon bonds towards the Paris climate protection target

The message of the IPCC report published at the beginning of August was unmistakable: if greenhouse gas emissions are not reduced immediately, quickly and comprehensively, the Paris climate protection target can no longer be achieved[1]‌. As a reminder: at the 21st UN Climate Change Conference in the French capital in December 2015, a total of 195 countries agreed to limit the increase in the global average temperature to "well below" two degrees Celsius compared to the pre-industrial era, if possible even to 1.5 degrees Celsius[2]‌.

Roughly speaking, this corridor was defined to avoid critical thresholds – so-called tipping points – in parts of the climate system, beyond which strong and partly unstoppable and irreversible changes occur. These critical elements include the tropical coral reefs, the Amazon rainforest, the permafrost, the Atlantic circulation, the Greenland ice sheet or the Sahel monsoon[3].

At least seven per cent lower emissions annually

"Very valuable instruments that asset managers can use to help achieve the climate protection target agreed in Paris are the so-called ‘Paris Aligned Benchmarks’ for corporate bonds," says Bernhard Birkhäuser, portfolio manager of DWS Invest Low Carbon Bonds. These benchmarks are constructed in such a way that the greenhouse gas emissions of the companies included develop in such a way that the agreed limitation of global warming to 1.5 degrees Celsius can be achieved.

According to the European Union, emissions of climate-damaging gases must be at least 50 per cent below the broad market and must decrease by at least seven per cent annually by 2050[4]. To achieve this reduction, the benchmarks are regularly reviewed and companies are replaced if necessary. In the case of the "Solactive ISS Paris Aligned Select Euro Corporate IG", for example, the benchmark index of the DWS Invest Low Carbon Bonds, such reviews take place monthly.[5]

"These benchmarks set out a transparent and verifiable path towards achieving the Paris climate protection target. However, fund managers also make active investment decisions outside of these indices in order to be able to seize opportunities," says Birkhäuser. Companies, that have clear targets for reducing their greenhouse gas emissions, can thus access the debt capital they need for this transformation process.

In this process, some industries not only face immensely cost-intensive technological challenges but are also forced to flexibly adapt their business models. The automotive industry, for example, is currently confronted with the task of converting its vehicles to electric drives. At the same time, however, it has to cope with the fact that the share of leasing business has increased significantly. This has to do with the fact that the introduction of new technologies is fraught with risks regarding residual values, which the customer is happy to leave to a lessor.

Low risk of a bubble forming

But what happens if a large number of bond funds, with the aim of contributing to the achievement of the Paris climate protection target, have to further reduce the greenhouse gas emissions of the portfolio every year? Don't all providers of such products then automatically slide into the same bonds, so to speak? For reasons of diversification and valuation, that would not be desirable. "However, this can be countered by the fact that with corporate bonds issued in euros, for example, a reduction in greenhouse gas emissions of 50 percent can still be achieved with 90 percent of this investment universe," says Birkhäuser. Moreover, in his opinion, a whole series of companies should reduce their own greenhouse gas emissions by seven or more percent over the course of twelve months. This would allow to accompany them on their way in the long term.

However, there are certain limits to this "accompanying" by the standards for benchmarks that contribute to the achievement of the Paris climate protection target. Because according to the European Union, the level of greenhouse gas emissions in a "Paris Aligned Benchmark" must be at least 50 percent below the broad market, the bonds of car manufacturers, for example, can only be integrated into a portfolio in small doses. "However, their successful transformation is not only capital-intensive, but paradoxically also one of the key factors in the fight against climate change," says Birkhäuser.

 

For further information please contact:

Sabina Diaz Duque
+49 (0)69 / 910 14177
sabina.diaz-duque@dws.com                                       

Kathrin Mahr
+49 (0)69 / 910 13388
kathrin.mahr@dws.com

 

About DWS Group

DWS Group (DWS) is one of the world's leading asset managers with EUR 859bn of assets under management (as of 30 June 2021). Building on more than 60 years of experience, it has a reputation for excellence in Germany, Europe, the Americas and Asia. DWS is recognized by clients globally as a trusted source for integrated investment solutions, stability and innovation across a full spectrum of investment disciplines.

We offer individuals and institutions access to our strong investment capabilities across all major asset classes and solutions aligned to growth trends. Our diverse expertise in Active, Passive and Alternatives asset management – as well as our deep environmental, social and governance focus – complement each other when creating targeted solutions for our clients. Our expertise and on-the-ground-knowledge of our economists, research analysts and investment professionals are brought together in one consistent global CIO View, which guides our investment approach strategically.

DWS wants to innovate and shape the future of investing: with approximately 3,500 employees in offices all over the world, we are local while being one global team. We are investors – entrusted to build the best foundation for our clients’ future.

1. https://www.ipcc.ch/2021/08/09/ar6-wg1-20210809-pr/

2. https://www.bmu.de/en/topics/climate-adaptation/climate-protection/international-climate-policy/climate-conferences

3. https://www.pik-potsdam.de/en/output/infodesk/tipping-elements/kippelemente?set_language=en

4. https://ec.europa.eu/info/sites/default/files/business_economy_euro/events/documents/finance-events-190624-presentation-climate-benchmarks_en.pdf

5. https://www.solactive.com/wp-content/uploads/2021/08/Guideline_Solactive_ISS_Paris_Aligned_Select_Euro_Corporate_IG_Index_v1.01.pdf

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