Stockholm (NordSIP) – Oceans and other bodies of water cover two-thirds of the planet and are crucial for our ecosystems, controlling weather patterns and temperatures. However, efforts to sustainably exploit and manage these resources are still not up to our hopes.
According to German development bank KFW, the United Nations Sustainable Development Goal (SDG) “Life Below Water” (SDG 14) “remains the least funded SDG”, with a US$150 billion per year funding deficit vis-à-vis its goal. The other water-related SDG, “Clean Water and Sanitation” (SDG 6) is not much further ahead, ranking in as the sixth least funded goal, facing a deficit of US$30 billion.
To contribute to efforts to address these issues, Fidelity International announced the launch of the Fidelity Funds 2 – Blue Transition Bond Fund, the first blue transition fixed income fund to launch globally according to its market analysis. The fund aims to balance ocean, coastal and in-land river system usage and resources with the conservation of healthy and productive marine and freshwater ecosystems.
The Fund is classified as an Article 8 product under the EU Sustainable Finance Disclosures Regulation (SFDR) and will be managed by Kris Atkinson and Shamil Gohil, which have an aggregate of over 42 years’ experience and are backed by Fidelity’s extensive global investment and sustainable investing resources.
“The bond market is uniquely positioned to help support the blue transition, given its size and greater number of issuers across both public and private entities in the corporate and sovereign issuer space,” says Kris Atkinson.
Goals of the Blue Transition Bond Fund
The Fund aims to achieve capital growth over the long term, focusing on supporting the transition towards improved ocean and freshwater health by investing in global bonds or bonds of issuers that fulfil three criteria. The securities or their issuers must contribute to ocean and freshwater objectives aligned with one or more UN SDGs.
Bond proceeds must also finance projects benefiting ocean and freshwater related sustainability (including blue bonds). The bonds or their issuers must also seek to improve the management of water-related risks and opportunities. Lastly, the fund’s investments aim to reduce the negative impact of climate change on the ocean or freshwater.
“We are particularly focused on Blue Bonds, a sub-component of the green bond market, which finance ocean and freshwater-related projects. However, Blue Bonds alone are not sufficient for investors looking to support ocean and freshwater themes while aiming to generate attractive risk-adjusted returns. A broader more holistic approach needs to start at the issuer level, investors should consider how a company operates, which products and services it offers, and how these align to the blue transition,” Atkinson says.
Thresholds and Exclusions
The fund’s investments will also fulfil two guidelines. A minimum of 80% of the fund’s assets should be invested in bonds or bonds of issuers that support the transition towards improved ocean and freshwater health. Moreover, a minimum of 20% of the fund’s assets should be invested in sustainable investments of which 1% have an environmental objective (which is aligned with the EU Taxonomy). Another minimum of 10% of the assets should be conducted with an environmental objective (which is not aligned with the EU Taxonomy). Lastly, a minimum of 5% of the fund’s investments should have a social objective.
In respect of direct investments, the fund is subject to three conditions. On the one hand, the fund must comply with a firm-wide exclusions list, which includes cluster munitions and anti-personnel landmines. On the other hand, the fund applies a principle-based screening policy) Climate Transition Benchmark exclusions. The exclusions and screens (the “Exclusions”) may be updated from time to time.
The screening policy takes two approaches. The fund uses norms-based screening of issuers that the Investment Manager considers have failed to conduct their business in accordance with international norms, including as set out in the UNGC The fund also uses negative screening of certain sectors, issuers or practices based on specific ESG criteria where revenue thresholds may be applied.
According to its prospectus, the fund uses the Bloomberg Global Aggregate Corporate Index, as a benchmark for risk monitoring, investment selection and performance comparison. This index does not take into account ESG characteristics.
“The blue transition is a global challenge and so our approach is global too, covering the broadest fixed-income investment universe possible. As credit investors, we need to ensure we back our principal and interest so we use Fidelity’s vast and experienced team of investment professionals to screen out bonds which don’t meet our credit fundamental and valuation thresholds. The result is a globally diverse, high-quality, fixed/income portfolio which helps to support the blue transition,” Atkinson adds
Regulatory Context
The focus of Fidelity’s new fund on transition seems reminiscent of recent regulatory developments. This is not accidental. “The fund was designed to be aligned with the ESMA Guidelines on funds’ names using ESG and sustainability terms,” to Paul Milon, Director Sustainable Investingtells NordSIP. “As part of the ESMA Guidelines on funds’ names using ESG and sustainability terms, funds using ‘transition’ related names should ensure that investments used to meet the 80% threshold are on a clear and measurable path to social or environmental transition,” Atkinson adds.
“We hold that ‘transition’ can be evaluated and evidenced at both a company and industry level. Fidelity proposes that theme-specific metrics should be used to demonstrate a fund or issuer’s alignment to a clear and measurable transition path,” Milon continues.
According to Atkinson, the fund requires one of two conditions to be fulfilled for an economic transition (e.g. energy transition, climate transition, blue transition, etc.) to happen. On the one hand, solutions must be present to enable the transition. These are “investments that enable/make a direct positive contribution to the transition (e.g. an energy transition fund should be able to include investments in renewables),” Milon explains.
On the other hand, for these solutions to be financed, there need to also be leaders that conduct these transition investments, what the fund refers to as “Transitioning issuers that may not currently have a positive impact on the desired future state (e.g. a net zero economy), but which are assessed as transitioning/improving towards contributing to that future state (e.g. that energy transition fund could include a power company transitioning from fossil fuel power to low carbon/renewables, hence reducing its negative impact on climate and moving towards a positive impact on the energy transition),” Milon argues.
