FIXED INCOME

Introducing the Invesco Net Zero Global Investment Grade Corporate Bond Fund

This Article 9 fund offers the opportunity to build resilience for the future, while investing in companies that are decarbonising today.

Net zero: the race is on

To hold off some of the worst climate impacts, we must hold temperature rises to 1.5°C above pre-industrial levels. According to the Science Based Targets initiative (SBTi), this means halving greenhouse gas emissions by 2030 and hitting net zero emissions by 2050.

Large corporates account for nearly one fifth of total global carbon emissions.¹ So we believe a large corporate credit strategy like this one is a good place to focus our attention as we look to support net zero goals.

Navigate a world of ESG risk and opportunity

As investors navigate the transition period and look for the winners that will shape our new economy, they are facing unprecedented risks and opportunities.

This fund follows a net zero approach based on an investment framework set out by the Paris Aligned Investment Initiative (PAII). It aims to contribute to the achievement of net zero by 2050 or sooner, while seeking to deliver income and long-term capital growth.

Why consider this fund?

All sectors will need to decarbonise if we’re to achieve net zero by 2050. In recognition of this, we allocate to some of the highest emitting sectors with the aim of ensuring progress through commitments to net zero. To remain eligible for the fund, companies must demonstrate progress in addressing their emissions in line with the Paris temperature goals. We believe this is the best way to effect real-world change. 

Issuers that are ill prepared for transition, or incompatible with a net zero economy, will likely suffer defaults, losses and impairments. We believe that allocating to climate-resilient companies will improve the long-term credit quality of the fund.

We look beyond regional biases for a truly global approach. By examining opportunities from around the world, we look to create portfolios that provide our clients with consistent income and capital growth.

Unlike traditional corporate bond managers, we don’t just focus on market timing and security selection. Instead, we go further. We identify the big themes driving economies and use this analysis to help drive our issuer selection. These themes could include things like:

  • Decarbonisation/net zero transition
  • The impact of Russia’s war on the energy and utilities sectors
  • The transition of global economies from stagflation to stagnation
  • And so on…

We also implement “macro overlays” to manage the overall risk of the fund through the cycle. This involves using derivatives, which help reduce transaction costs compared to trading in and out of corporate bonds.

Access the Invesco Net Zero Global Investment Grade Corporate Bond Fund product page to view KIDs/KIIDs and factsheets.

Investment risks

  • 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.

Our objective, philosophy and approach

When we launched our net zero fund in June 2022, portfolio manager Lyndon Man sat down to discuss its key features and the thinking behind the strategy. Here’s everything you need to know in 10 minutes.

Video about income and Invesco’s mixed assets

Transcript

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.

  • 00:27: How are ESG considerations increasing in the fixed income space?
  • 00:59: How are you responding to the increased demand for sustainable products?
  • 02:04: Why are you launching a net zero, Article 9 fund?
  • 03:40: What does the new fund look to achieve?
  • 04:10: How will the fund look to achieve its objective?
  • 06:14: What is the fund’s underlying philosophy?

Meet the team

The lead managers for the fund are Lyndon Man and Luke Greenwood. They have co-managed the team since 2013. Together they have a combined 50 years of industry experience and have navigated a broad range of economic cycles. They are supported by Michael Booth and Matthew Henly, and draw on the resources of Invesco’s global fixed income platform. The platform is made up of over 170 professionals, averaging 18 years of industry experience and 11 years with Invesco. 

Fund facts

Frequently asked questions

“Net zero” refers to a state where greenhouse gas (GHG) emissions are balanced by GHG removals from the atmosphere. The “net” in net zero is important because it will be difficult to reduce all emissions to zero on the required timescale. As well as deep and widespread cuts in emissions, there will likely be a need to scale up GHG removals. The Paris Agreement underlines the urgency of net zero, requiring states to aim to limit global warming to well below 2°C, and preferably to 1.5°C. 

The Paris Agreement is a legally binding international treaty on climate change adopted in December 2015. Its goal is to limit global warming to well below 2°C, preferably to 1.5 °C, compared to pre-industrial levels. 

Net Zero Asset Managers Initiative is a network of asset managers with over $59 trillion in assets under management, which is committed to achieving the goals of the Paris Agreement.² Invesco joined the initiative in March 2021.

The Paris Aligned Investment Initiative (PAII) provides a common set of recommended actions, metrics and methodologies through which investors can maximise their contribution to achieving global net zero global emissions by 2050 or sooner. The PAII was established in May 2019 by the Institutional Investors Group on Climate Change. The PAII’s objective is to ensure investors can decarbonise investment portfolios and increase investment in climate solutions, in a way that is consistent with a 1.5°C net zero emissions future.

Footnotes

  • Based on MSCI data as of 31 December 2021.

    Figures are as of 31 December 2022.

Important Information

  • Data is as at 28 February 2023, sourced from Invesco unless otherwise stated. This is marketing material and not intended as a recommendation to buy or sell any particular asset class, security or strategy.

    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.

    EMEA2823240/2023