Asian asset owners, particularly pension funds and insurance companies, are in danger of losing massive amounts of the value of their assets unless they can transition their fixed-income portfolios to low-carbon assets on time to meet the targets set in the Paris climate agreement.

Since fixed-income assets make up the bulk of their portfolios, these institutions must be able to transition their portfolios to achieve the target of limiting global warming to well below 2 degrees Celsius, preferably to 15°C, compared to pre-industrial levels, by 2050.

This means asset owners have to actively manage (versus passively managing) their fixed-income portfolios and navigate the impact of climate-driven technology and policy changes on portfolio performance in line with the recovery in global economic activity post-pandemic, according to a white paper, “Building carbon transition fixed income portfolios”, published by J.P. Morgan Asset Management (JPMAM) in February 2021.

The challenge that faces asset owners, particularly insurance companies, is that their portfolios are heavily invested in sovereign bonds which are highly exposed to high-carbon industries.

This has material consequences for passively managed fixed-income portfolios, the traditional go-to investment strategy for pension funds and insurance companies. Insurers’ fixed-income portfolios, in particular, have sovereign bond holdings that are most exposed to high-carbon industries and could suffer a decline in value of up to 4%, according to JPMAM.

Corporate bond portfolios will also feel the impact of climate change policies because the introduction of emissions trading schemes, or outright carbon taxes, are likely to expose costs previously unaccounted for in an issuer’s balance sheet and cash flow expectations which could have material impacts on credit fundamentals and ratings.

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