Building a climate transition fixed income index

Fixed income indices are important in the transition to net zero journey, discover why and how the TPI Carbon Performance and Management Quality data can be used to build climate transition fixed income indices.

It's important to build climate transitionfixed income benchmarks, as they are a mechanism for investmentsto flow, to invest in the low carbon economy.Benchmarks are used predominantly for performance measurement,but they can actually be used as a passive index strategyto enable some form of engagement by the investor.We've been working on climate transition fixed income measurements for a while now,and the reason funding transition is so important is that there are estimatesof around 7-9 billion USD required in order to achievea 2050 net zero target for a low carbon economy.So provides you 2025, 2035, 2050 assessment,that can be used with fixed income investment, whichalso have different horizons in them.So using TPI Carbon Performace Dataand MQ data, is really interesting with fixed income investing,especially the Carbon Performance data,which has different assessments for different horizons,and this can be used for fixed income investing in an appropriate way.The challenges of course, is mapping that data to bonds acrossthe capital structure of corporates, which we have built enhanced processes for.Additionally, the other complexity of course, is thatM&A activity has different implications on fixed income to equities.So the current solution, which I'm most excited about,I think takes a pragmatic approach to fixed income investing.It really tries to utilise the primary markets as an engagement tool,so the assessments for index inclusion looks atTPI Carbon Performance in the high carbon intensity sectors.So for our climate transition benchmark, we're looking specificallyat the TPI Carbon Performance and Management Quality data sets.The Carbon Performance datapresents an interesting data set because it provides different assessmentsfor different horizons, which works well with a fixed income portfolio.We have integrated that with the solution,and some of the challenges that come with this is being able to map that dataset across all the multiple bonds and structures and regionsand subsidiaries is a difficulty and also how that interacts with mergersand subsidiaries is a difficulty and also how that interacts with mergersand acquisitions and, you know, privatisation or nationalisation.For more information visit our website.

Richard Davies, Director of Fixed Income and Multi-Asset Products, FTSE Russell