The Value of Climate-Related Financial Disclosures for a Fixed Income Investor

By: Sustainability Accounting Standards Board, PineBridge Investments

With hundreds of climate-related policies globally and central banks on the verge of developing financial stress testing aligned with climate-related scenarios, investors are increasingly asked to refocus on their own assessment of climate risks and opportunities at the individual portfolio level.

This case study is an extract from an article with insights from Alessia Falsarone, Managing Director, PineBridge Investments. Click on the link below to read the full article.


What was the initial approach used?

Access to an issuer’s very-own disclosures and discussion of its unique position with respect to the financial risks associated with climate change are instrumental to form an investment thesis given the time horizon under consideration, where the average maturity of newly issued developed market credit instruments is in excess of 10 years.

Where lack of comparable year-over-year disclosures limits an investor’s ability to define if the issuer is on an improving journey towards climate readiness, direct engagement with both companies and data providers is becoming as valuable to bondholders as it has been for shareholders in bridging the informational gap. It is also an opportunity for fixed income investors to establish a dialogue with company representatives beyond the investor relations or treasury departments. In my experience, over the past three years, issuers that access the higher-quality credit spectrum (traditional investment grade-rated companies) have exhibited an increasing appetite to discuss their corporate journey with “those who ask” and incorporate investors’ feedback in their corporate disclosure planning.

Since their launch in 2017, the TCFD recommendations have provided much-needed reference guidance to promote the integration of climate-related information in investors’ due diligence. Adding to the utility of this guidance is the high level of alignment between Corporate Reporting Dialogue participants’ practical frameworks and the TCFD recommendations. For example, although the SASB standards are in their early stages of implementation, they have already equipped corporate reporters and investors with foundational metrics that facilitate the flow of TCFD-aligned financial disclosures related to risk management. We find that by overlaying the SASB materiality framework in the analysis of climate risks, as credit investors we are able to:

  1. define top-down, sector-specific climate-related scenario parameters that prioritize the financially material outcomes of climate risk in terms of both direct and indirect impacts, and
  2. provide an actionable roadmap for our portfolio de-carbonization efforts at the individual holding level as a function of time vs. cost associated in the context of best available technologies.

Specifically, through the lens of our proprietary Key Risk Indicators (KRIs) for developed credit market issuers, we have been able to assess how longer-term ESG trends in alignment with SASB’s financial materiality sector guidance affect portfolio exposures to varying degrees of climate stress.

Further insights

While the risk profile of everyday portfolios has become inherently more global, harmonization efforts such as the Better Alignment Project magnify the value of investor engagement. Moving forward, shifting from the assessment of corporate disclosures to sustainability performance will be key for fixed income investors to embed cost of capital considerations in pricing climate change externalities as part of the credit risk profile of sustainability underperformers and reward sector-level transition milestones with increased asset flows.