Building a climate-resilient buy-and-maintain credit portfolio

• Build a buy-and-maintain credit portfolio that matches liability cash flows and has a net-zero 2050 ambition.

• Balance the economic and regulatory profile of the portfolio with restrictions and objectives that are driven by sustainability.

Investor objectives we often tailor to:

• Cash flows: Cash flow certainty on customized tenures

• Return: Optimal return vs liabilities and reference universe

• Costs: Low-fee and low transaction costs

• Sustainability: Specific climate and SDGs targets

• Risks: Avoiding fallen angels and credit impairments

• Achieving a portfolio net-zero pathway requires an integrated approach

• Proper application of relevant forward-looking analytics is key

• Portfolio optimization needed to secure investor-specific investment objectives

When it comes to aligning a portfolio with a net-zero 2050 ambition, an important aspect to consider is the forward-looking portfolio profile of the carbon footprint. Forward-looking climate analytics, such as the Robeco Paris Alignment Assessment (based on our ‘traffic light’ system, which assesses a company’s degree of alignment with a below 2 °C scenario), play an important part in this.

The portfolio in this case study needs to limit the number of fallen angels, match the target cash flow, uphold a minimum rating, have an optimal spread, maintain low capital requirements, make an impact across the SDGs and limit the current and future carbon footprint.

After an in-depth client consultation, we constructed a portfolio that balances the client’s various risk, return, regulatory and sustainability criteria. Figure 1 illustrates how this portfolio measures up versus a passive reference across a range of metrics.

The SDGs can be used to further generate a targeted impact on specific investors’ sustainability objectives through alignment with a specific set of the UN SDGs. Also, by allocating solely to companies that score positively on the SDGs, an SFDR article 9 portfolio can be created.

Investors have their work cut out in implementing ambitious investment-related targets for Paris-aligned investing. Forward-looking climate metrics are crucial in this process of constructing and maintaining portfolios that decarbonize over time. In practice, we see that incorporating meaningful climate and SDG objectives into a portfolio can usually be achieved with limited impact on the return potential and quality of the portfolio. The more constrained the portfolio is, however, the more challenging this becomes. We can help investors assess the possible financial impact of incorporating SDG and climate-driven constraints on their portfolio.