Stockholm (NordSIP) – As awareness of biodiversity increases, there’s an argument to be made that fixed-income investors genuinely seeking to support bio-diversity should align their portfolios with the relevant frameworks. In a recent note, the Anthropocene Fixed Income Institute (AFII) analyses the potential of government bond portfolios aligning with the Kunming-Montreal Global Biodiversity Framework, which was adopted during the fifteenth meeting of the Conference of the Parties (COP 15) in December 2022. The centrepiece of this framework is the COP15’s 30×30 target, which refers to the goal of protecting 30% of the planet’s surface by 2030.
To address this issue, Stephanie Mielnik, Thomas White and Ulf Erlandsson of the AFII use the Xtrackers II Global Government Bond UCITS ETF (DBZB) to study the relationship between sovereign exposure and the protection of terrestial areas. Assuming that the portfolio’s exposure to protected areas (the “WAPL” – Weighted Average Protected Land) is equal to the weighted average of each country’s percentage of protected areas, the DBZB actually misses the 30% global goal by 9 percentage points. Nevertheless, it is seen as a good starting point.
To determine whether investors can achieve a 30% WAPL while reasonably matching the risk and return profiles of the original index/ETF, the authors consider an “optimal portfolio” approach that maximises WAPL while matching a predetermined level of tracking error. Their analysis is particularly focused on how to approach the importance and non-alignment of US Treasuries in this context.
“Global DM portfolios heavily allocated in US Treasuries – a country substantially falling short of the GBF’s ’30×30′ terrestrial targets – may face significant challenges. To transition a portfolio toward the 30×30 regime requires a trade-off between alignment strength and US active risk. As it appears unrealistic for investment managers to drastically reduce their allocation to the US, we propose that investors ramp up their engagement with the country at the very least,” Mielnik, White and Erlandsson explain.
“The growing sovereign SLB market22,23 provides an opportunity for increasing inclusion of biodiversity metrics in the sovereign fixed income space and a platform for investors to step-up their biodiversity engagement,” the report concludes.
