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Low-carbon investing across all our quantitative strategies

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BNP Paribas Asset Management
 

As a future maker, BNP Paribas Asset Management has put sustainability at the core of its investment process. This is reflected in our commitment to a low-carbon environment. Portfolio decarbonisation has been of primary concern in our overall strategy of sustainability integration.

In previous articles, we have explained why low-carbon investing matters with regards to both the environmental threat and its economic rationale. We went on to describe how investors have adopted decarbonisation as one of four measures, along with divestment, shareholder engagement and green investments, to take action against risks associated with climate change.

In line with this, 2020 has seen the introduction by the quantitative fixed income team of an objective of significant carbon footprint reduction as a new sustainability goal. In the multi-factor credit strategy, the team now systematically achieves a 50% carbon footprint reduction relative to the index.

 

Expanding the carbon footprint reduction objective to the multi-factor credit strategies

Since 2018, our multi-factor credit strategy has integrated sustainability into the investment process and portfolio construction through the following three objectives:

  • Achieve a significant improvement of the portfolio’s ESG[1] score relative to the reference index
  • Perform sector-based exclusions consistent with BNP Paribas Asset Management’s Responsible Business Conduct policy
  • Exclude the 10% of securities with the worst ESG scores

In 2020, we have gone a step further by incorporating a new environmental objective aligned with our views and commitments. During the course of this summer, the quantitative fixed income team decided to systematically add the following environmental objective to its strategy:

  • Reduce by 50% the carbon footprint of the multi-factor credit strategy relative to the reference index

In measuring decarbonisation we apply the Greenhouse Gas (GHG) Protocol, an internationally recognised greenhouse gas accounting standard. The GHG Protocol classifies a company’s GHG emissions into three ‘scopes’. Our goal of a 50% reduction in carbon footprint aims at covering scopes 1 and 2 under the GHG protocol. Scope 1 of the GHG Protocol consists of direct emissions from owned or controlled sources. Scope 2 covers indirect emissions from the generation of purchased electricity, steam, heating and cooling consumed by the reporting company. Scope 3 includes all the other remaining indirect emissions that occur in a company’s value chain.

From now on, carbon footprint reduction is comprehensively implemented  across all portfolios managed with a multi-factor credit investment approach. We do not believe the risk/return profile of our strategy will be impacted over the long term. While reducing by half the portfolios’ carbon footprint, they are still structured to deliver the same performance as the non-decarbonised version.

 

Carbon footprint reduction implemented across all our quantitative strategies

When we design, research and implement multi-factor Investment strategies, we target three main investment goals:

  • Deliver stable outperformance versus the reference index
  • Control investment risks such as beta and tracking error for equity products, or duration and spread for fixed income products
  • Integrate Sustainability at the heart of portfolio construction

When it comes to the last objective, carbon footprint reduction has been implemented in our quantitative multi-factor equity strategies since 2018. However, within fixed income, due to inadequate data, particularly in the corporate bond segment, we could not replicate the carbon reduction objective in our multi-factor credit strategies.

After a concerted effort recently by the Sustainability Centre and our ESG provider, we have succeeded in obtaining a better coverage of corporate bond indices. As a result, our entire set of quantitative strategies now integrate the objective of carbon footprint reduction through issuer selection and/or stocks with a lower impact on our planet.

 

Conclusion

Both our quantitative equity and quantitative fixed income strategies now integrate the environmental objective of carbon reduction as a key feature among our sustainability integration goals. The quantitative team and the Sustainability Centre will continue to innovate in the years to come and combine efforts to integrate sustainability as a future maker. This process will include the following steps:

  • Integration of climate-related risks and opportunities into core investment processes.
  • Expand universe of opportunities to research, explicitly incorporating climate alignment and low-carbon transition.
  • Review and report on these priorities and outcomes on an annual basis as part of the Task Force on Climate Related Financial Disclosures (TCFD) disclosure efforts.
  • Identify areas where the portfolio structure might evolve in the future, including undertaking scenario analysis and portfolio alignment with the Paris Agreement goals.
  • Review and report on these considerations on an ongoing basis as part of the TCFD disclosure efforts.

The information provided is for information purposes only. It is not intended to solicit the subscription to or the sale of any financial instruments. In no event shall the content be deemed as investment advice with respect to any financial instruments or investment service, or an offer to purchase or sell these. In addition, as the presentation of financial instruments or investment services in itself does not allow the making of a contract, it may neither be considered as a solicitation for purchase or sale of financial instruments or investment service or an offer of such to the public.

 


[1] ESG  Environmental, Social and Governance

 

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Investments in the aforementioned fund are subject to market fluctuation and risks inherent in investing in securities. The value of investments and the revenue they generate can increase or decrease and it is possible that investors will not recover their initial investment. Source: BNP Paribas Asset Management.

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