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A Customized Climate Bond Strategy Addressing Climate Integration Needs

ESG is dynamic and fast moving. As investors and asset owners seek to integrate ESG criteria into their existing portfolios, they are collaborating with asset management firms such as State Street Global Advisors to facilitate efficient allocation and put ESG into motion thoughtfully, with various risk and return parameters considered. New technology and big data are creating tremendous opportunities for investors while also disrupting conventional approaches to portfolio management.

October 31, 2023

Rupert Cadbury, OTHR

Sustainable Investing Strategist

Scenario

Investors are increasingly seeking investment strategies which have the dual aim to a) minimize tracking error against a strategic benchmark while also b) striving to promote decarbonization in the real world and facilitate the low-carbon transition.

In this example, we received a request from a pension client to integrate ESG into its global corporate bond portfolio. The client wished to continue tracking a bespoke (non-ESG) benchmark and therefore aimed to integrate their ESG objectives within the portfolio construction process. Key criteria for the client were delivering on their defined ESG objectives while tightly controlling risks.

Disclosure

Important Information

The information contained in this communication is not a research recommendation or ‘investment research’ and is classified as a ‘Marketing Communication’ in accordance with the Markets in Financial Instruments Directive (2014/65/EU) or applicable Swiss regulation. This means that this marketing communication (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research (b) is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This communication is directed at professional clients (this includes eligible counterparties as defined by the appropriate EU) regulator who are deemed both knowledgeable and experienced in matters relating to investments. The products and services to which this communication relates are only available to such persons and persons of any other description (including retail clients) should not rely on this communication.

The views expressed are the views of the State Street Global Advisors Nordic Sales Team through May 10, 2023, and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance, and actual results or developments may differ materially from those projected.

Investing involves risk including the risk of loss of principal.

The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.

All information is from SSGA unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor.

All the index performance results referred to are provided exclusively for comparison purposes only. It should not be assumed that they represent the performance of any particular investment.

The trademarks and service marks referenced herein are the property of their respective owners. Third party data providers make no warranties or representations of any kind relating to the accuracy, completeness or timeliness of the data and have no liability for damages of any kind relating to the use of such data.

Equity securities may fluctuate in value and can decline significantly in response to the activities of individual companies and general market and economic conditions.

The returns on a portfolio of securities which exclude companies that do not meet the portfolio’s specified ESG criteria may trail the returns on a portfolio of securities which include such companies. A portfolio’s ESG criteria may result in the portfolio investing in industry sectors or securities which underperform the market as a whole.

Estimated and unaudited SSGA ESG assets under management as of March 31, 2023 as calculated by SSGA for ESG Accounts. SSGA defines an “ESG Account” as a client account (i.e., fund or separately managed account managed by SSGA) that utilizes an investment strategy that falls into one of the following three categories, which are not mutually exclusive:

Negative ESG Screen, as defined below
Positive ESG Screen, as defined below
Third-Party ESG Index, as defined below

Negative ESG Screen A “Negative ESG Screen” (also known as an exclusionary screen) is a screen incorporated into the investment strategy utilized for the management of a portfolio that results in the exclusion from the portfolio of securities of issuers The methodology used by SSGA to identify ESG AUM may differ from the methodology used under certain classification and disclosure regulatory regimes. SSGA’s ESG AUM may include AUM of client accounts for which a negative screen is applied at the request of the client for regulatory or other purposes, which may not be disclosed to SSGA, that SSGA believes results in the exclusion from the client’s portfolio of securities based on ESG criteria.

Positive ESG Screen A “Positive ESG Screen” is a screen incorporated into the investment strategy utilized for the management of a portfolio that intentionally includes securities of issuers identified as having positive ESG characteristics (including positive characteristics of sub-components of ESG such as environmental, climate or social characteristics) relative to the issuer’s industry or sector peers. Positive ESG Screens include but are not limited to targeting an overall improvement of a portfolio’s ESG profile as compared to a benchmark or stated investment guideline, measured by an ESG score or an ESG metric, or investing only in issuers within an industry or sector that score higher within that industry or sector than the issuer’s peers.

Third-Party ESG/Sustainable Index Investment Strategies An index-tracking client account qualifies as an ESG Account if it tracks a Third-Party ESG/Sustainable Index. An index is deemed to be a “Third-Party ESG/ Sustainable Index” if the index methodology incorporates ESG/Sustainable factors or characteristics that are utilized by the third-party index provider to determine which securities and/or how much in weight are included as index constituents. A client account that utilizes a Third-Party ESG/Sustainability Index as a reference benchmark for performance or reporting purposes, but does not seek to track such index as an investment strategy, does not qualify as an ESG Account unless it meets at least one of the first two prongs of the definition of “ESG Account” set forth above.

The methodology used by SSGA to identify ESG AUM may differ from the methodology used under certain classification and disclosure regulatory regimes. SSGA’s ESG AUM may include AUM of client accounts for which a negative screen is applied at the request of the client for regulatory or other purposes, which may not be disclosed to SSGA, that SSGA believes results in the exclusion from the client’s portfolio of securities based on ESG criteria.

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