Transitioning to a new world
BUILDING NEW MARKETS

Transitioning to a new world 

How do you think the Paris Agreement can affect fixed income investors as the world transitions away from fossil fuels?

Key takeaways:

The global economy is unlikely to meet the target of limiting global warming to well below 2 degrees Celsius

The transition to eco-friendlier solutions and products requires the restructuring of entire industries

Investors can benefit from that shift in multiple ways  Investors can benefit from that shift in multiple ways

The Paris Agreement aims to limit global warming to well below 2C. But as things stand, the world is not on track for this target: according to the Intergovernmental Panel on Climate Change (IPCC) [1], global warming of 2 degrees will be exceeded during this century unless deep reductions in Co2 and other greenhouse gas emissions occur in the coming decades.

It is clear that to get back on a sub-2 degree pathway, enormous changes will have to take place. For companies, we believe that this will mean restructuring to more carbon neutral products and attitudes. And like any new era, this may bring opportunities but also pitfalls for investors.

Some sectors will be more affected than others. Energy companies and car manufacturers are obvious examples of those that we believe will have to make great changes as they shift towards renewables and electric vehicles. But the reality is that very few sectors will be unaffected over the medium term: banks, for example, while relatively low CO2 emitters, might have exposure and risk via the companies they lend to and invest in.

For fixed income investors, in our opinion these are vital factors to bear in mind, because the restructuring involved will require a  huge change and high costs. ‘Fossil fuel-dominated sectors like oil companies or utilities are already facing deterioration of their credit rating,’ notes Alban de Faÿ. ‘But we believe that many sectors will need considerable restructuring as well as research and development to meet the 2 degree pathway [2].’

Fossil fuel-dominated sectors like oil companies or utilities are already facing deterioration of their credit rating.

ALBAN DE FAŸ,
Portfolio Manager, Fixed Income, Amundi France

But at the same time we believe that there will be considerable opportunities, de Faÿ points out. ‘Take, for example, the automotive sector. If a company is taking the lead in the development of electric vehicles, with the aim of making them available to a wider segment of the public rather than the wealthiest, we believe that they could be well positioned to capture market share in the future2.’Another vital element to consider, and one that is often overlooked, is the social repercussions as companies restructure and adapt to the transition. ‘We have to be sure that the transition to a low carbon economy is also socially acceptable, by which I mean that it doesn’t trigger negative consequences for some categories of the population, increasing inequality and social unrest,’ de Faÿ notes [2].

‘Taking the example of cars again, if Tesla were to be the only vehicle on the market, it would mean the energy transition is effectively only for the rich,’ he says [2].

On top of that it’s important to consider the fallout from the transition: a shift to manufacturing electric vehicles rather than traditional engines, for example, could mean some existing workers are put out of their jobs. This move will lead to an estimated 30% decrease of the workforce by 2030 or require a different skill set. How can companies manage the social issues relating to this?

Sources:

[1] https://www.ipcc.ch/report/ar6/wg1/downloads/report/IPCC_AR6_WGI_SPM.pdf
[2] Interview with Alban de Faÿ, Portfolio Manager, Fixed Income, Amundi France,10 May, 2021.

IMPORTANT INFORMATION

Unless otherwise stated, all information contained in this document is from Amundi Asset Management S.A.S. and is as of 30 May 2022. Diversification does not guarantee a profit or protect against a loss. The views expressed regarding market and economic trends are those of the author and not necessarily Amundi Asset Management S.A.S. and are subject to change at any time based on market and other conditions, and there can be no assurance that countries, markets or sectors will perform as expected. These views should not be relied upon as investment advice, a security recommendation, or as an indication of trading for any Amundi product. This material does not constitute an offer or solicitation to buy or sell any security, fund units or services. Investment involves risks, including market, political, liquidity and currency risks. Past performance is not a guarantee or indicative of future results. All investors should seek professional advice prior to any investment decision, in order to determine the risks associated with the investment and its suitability.

Date of first use: 30 May 2022

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