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Repo rates are expressed relative to SONIA, and the chart below displays the average repo rates that we have achieved over the past four quarters for three, six, nine and 12-month repos, shown as a spread to average SONIA levels at the time. The volatility and market uncertainty that resulted from the mini-Budget also weighed upon funding markets, particularly for shorter dated trades as can be seen from the achieved spreads below. Note that during the fourth quarter of 2022 no repos were traded with a 12m tenor so the chart reflects the previous quarter’s value.
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The secondary impact of the mini-Budget crisis centred around collateral and the velocity of movement; rather than a lack of balance sheet for repo funding (a la March 2020). Yet, the difficulties around collateral substitutions and settlements did in many cases prompt a review by individual banks’ credit officers, resulting in a temporary reduction or hiatus in repo balance sheet provision in some cases. Once these reviews were completed balance sheet availability opened up again – some with the addition of haircuts to provide additional protection to the bank. Of course, the momentous lack of certainty in the future path of interest rates also impacted the typical repo spread to SONIA as trading a fixed rate forced the banks to take a conservative view on where yields could reach.
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Climate change is real, and its impacts are being felt more keenly year on year.
As investors, we can and should be positioning our portfolios to reflect globally accepted net zero objectives. Not only does this align our stewardship of capital with client beliefs and objectives but it serves to reduce portfolio risk and potentially enhance returns. Companies who do not have credible plans to migrate towards net zero will likely see their valuations suffer, whilst conversely, companies that offer solutions to this not insignificant challenge are likely to be rewarded by investors.
Net zero is about reaching a state where humanity ceases to add greenhouse gases to the earth’s atmosphere, specifically carbon dioxide (CO2) which makes up the bulk of the six commonly accepted greenhouse gases. This does not necessarily mean zero emissions, but any emissions that need to be offset or captured in some way. That said, a key to reducing emissions is a drastic reduction in fossil fuel usage.
A globally agreed goal (2016 Paris Climate Agreement) is to limit the planet’s temperature rise to 1.5% relative to pre-industrial levels. To achieve this, emissions need to fall by 50% by 2030, relative to a 2019 base date, on the way to net zero by 2050. It is these headline objectives that typically inform an investment portfolio’s net zero framework.
As a signatory to the Net Zero Asset Management Initiative and a leading exponent of responsible investing, our corporate bond portfolios employ an approach based on the Paris Aligned Asset Owners’ Net Zero Investment Framework (NZIF).
The framework combines top-down objectives with bottom-up analysis, in addition to leaning heavily on our extensive engagement work to drive change in our investee companies. This latter point is linked to our objective to achieve real world change rather than simply applying exclusions that flatter a portfolio’s net zero characteristics, but fundamentally don’t change anything.
Top-down: At an aggregate portfolio level we are seeking a 50% reduction in emissions by 2030, relative to a representative benchmark universe. Ideally, this is achieved through change and evolution from our investee companies rather than simply divesting from high emitters. However, divestment will occur when engagement does not yield the desired results and there will be some firms whose businesses are simply incompatible with net zero (e.g. thermal coal).
Bottom-up: We asses investee companies against eight Paris derived net zero metrics (ambition, targets, targets aligned, disclosure, strategy, policy engagement, governance, climate risk and accounts) using data from five highly regarded sources (Climate Action 100+, Transition Pathway Initiative, Science-Based Targets Initiative, Carbon Disclosure Project, MSCI). This allows us to rate companies as aligned, aligning, committed, not aligned. We aim to have at least 70% of portfolio emissions either ‘aligned’ with a net zero trajectory or under engagement. Importantly, this assessment is emissions weighted, assigning higher weights to the highest emitters.
Engagement: Our experienced specialists within our responsible investment team undertake engagement with our investee companies on a range of topics, including those related to net zero. We are seeking to use our influence as providers of capital to these companies to drive positive change, as well as using this engagement to enhance our bottom-up analysis. This engagement work is tracked against explicit milestones and reported to clients six-monthly. We combine direct engagement with collaborative engagement (i.e. via industry bodies or in conjunction with other investors) depending on the approach we think will yield the best results.
Financial institutions are not given an alignment rating. Whilst climate change is a critical issue for these companies, much of their climate impact comes from indirect activity via their lending and investment books. Data and methodology relating to these activities is both limited and inconsistent. Whilst our framework will evolve as this data improves, we currently focus our efforts in this sector on our engagement work. For example, we are working through a specific project of engagement by banks relating to climate change. Milestones associated with this work include securing commitments to cease lending to certain industries such as coal fired power, setting explicit lending and investment net zero targets, linking these targets to executive pay and enhancing data availability. The second phase of this project includes checking that banks are following through on the commitments they made in the first phase of the project.
