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Client Solutions case

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

Insurers and pension funds face the imperative of finding investment solutions that generate sufficient returns while also managing various risks and increasing regulation. 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. In this case study, we dive into one of our pension fund clients who wanted to build a cash flow-optimized buy-and-maintain credit portfolio that also included a Paris-aligned climate objective.


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It takes the right metrics to engineer a Paris-aligned portfolio


Objectives

Objectives

  • 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


Insights

Insights

  • 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


Solution

Solution

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.

Outcomes

Outcomes

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.


Figure 1 | Case study portfolio characteristics

Figure 1 | Case study portfolio characteristics

Source: Robeco, Trucost, Bloomberg, and September 2023 valuations. For illustrative purposes only and based on model assumptions. Fundamental score ranges between -3, +3 and reflect Robeco’s credit analysts’ assessment of the credit quality. SDG score ranges between -3, +3 and reflects Robeco’s SI analysts’ assessment of the SDG alignment. Carbon footprint is Scope 1, 2 & 3 and indexed to passive reference. The fallen angel percentage uses average historical rating migration numbers annualized by dividing on the average portfolio maturity. Capital requirements based on European solvency capital requirements. In this example the portfolio cashflow profile is relatively evenly distributed across the 2024-2033 tenures. Paris-aligning companies are defined as companies that score as aligning or aligned on Robeco’s climate traffic light assessment. Climate laggards are defined as companies with a high carbon footprint and not scoring as aligned or aligning on Robeco’s climate traffic light assessment. Past performance and current spreads/yields are not a reliable indicator of future results. *Specific SDGs: 7. affordable and clean energy, 11. sustainable cities and communities, 13. climate action.

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Robeco aims to enable its clients to achieve their financial and sustainability goals by providing superior investment returns and solutions.

Important information This disclaimer applies to any documents and the verbal or written comments of any person in presentations or webinars on this website and taken together is referred to herein as the “Information”. The services to which the Information relate are NOT FOR RETAIL CLIENTS - The information contained in the Website is solely intended for professional investors, defined as investors which (1) qualify as professional clients within the meaning of the Markets in Financial Instruments Directive (MiFID), (2) have requested to be treated as professional clients within the meaning of the MiFID or (3) are authorized to receive such information under any other applicable laws and must not be relied or acted upon by any other persons. This Information does not constitute an offer to sell, or a solicitation of an offer to buy, any financial product, and may not be relied upon in connection with the purchase or sale of any financial product. You are cautioned against using this Information as the basis for making a decision to purchase any financial product. To the extent that you rely on the Information in connection with any investment decision, you do so at your own risk. The Information does not purport to be complete on any topic addressed. The Information may contain data or analysis prepared by third parties and no representation or warranty about the accuracy of such data or analysis is provided.
In all cases where historical performance is presented, please note that past performance is not a reliable indicator of future results and should not be relied upon as the basis for making an investment decision. Investors may not get back the amount originally invested. Neither Robeco Institutional Asset Management B.V. nor any of its affiliates guarantees the performance or the future returns of any investments. If the currency in which the past performance is displayed differs from the currency of the country in which you reside, then you should be aware that due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency. Robeco Institutional Asset Management B.V. (“Robeco”) expressly prohibits any redistribution of the Information without the prior written consent of Robeco. The Information is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use is contrary to law, rule or regulation. Certain information contained in the Information includes calculations or figures that have been prepared internally and have not been audited or verified by a third party. Use of different methods for preparing, calculating or presenting information may lead to different results. Robeco Institutional Asset Management UK Limited (“RIAM UK”) is authorised and regulated by the Financial Conduct Authority. RIAM UK, 30 Fenchurch Street, Part Level 8, London EC3M 3BD (FCA Reference No:1007814). The company is registered in England and Wales under Ref No. 15362605.

In all cases where historical performance is presented, please note that past performance is not a reliable indicator of future results and should not be relied upon as the basis for making an investment decision. Investors may not get back the amount originally invested. Neither Robeco Institutional Asset Management B.V. nor any of its affiliates guarantees the performance or the future returns of any investments. If the currency in which the past performance is displayed differs from the currency of the country in which you reside, then you should be aware that due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency. Robeco Institutional Asset Management B.V. (“Robeco”) expressly prohibits any redistribution of the Information without the prior written consent of Robeco. The Information is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use is contrary to law, rule or regulation. Certain information contained in the Information includes calculations or figures that have been prepared internally and have not been audited or verified by a third party. Use of different methods for preparing, calculating or presenting information may lead to different results. Robeco Institutional Asset Management B.V. is authorised as a manager of UCITS and AIFs by the Netherlands Authority for the Financial Markets and subject to limited regulation in the UK by the Financial Conduct Authority. Details about the extent of our regulation by the Financial Conduct Authority are available from us on request.