Alan Meng
Jaakko Kooroshy
Naman Sharma
Nitish Ramkumar
There are many ways investors can address climate risks in fixed income portfolios. Calibrating exposure to carbon-intensive debt and the associated risks is one of the key approaches. However, due to the complexity of fixed income markets – which are composed of millions of securities issued by tens of thousands of issuers and special purpose vehicles whose ownership structure can be opaque – investors often struggle to identify and track exposure to bonds that are associated with carbon-intensive activities. Neglecting these complex ownership structures can produce misleading results when analysing climate risks in fixed income portfolios.
By identifying and analysing 482,931 carbon-intensive debt securities issued between January 2000 and June 2023 with US$21.5 trillion cumulative issuance and US$5.5 trillion outstanding as of 30 June 2023, this research and our algorithmic-based approach help investors understand and track carbon-intensive fixed income holdings. Taking this approach also enables investors and other stakeholders to engage more effectively with the largest groups/parent entities rather than each of subsidiary or debt-issuing vehicles.
Key findings from our research that investigates the debt financing in carbon-intensive sectors:
- With a total of US$5.5 trillion outstanding as of June 2023, carbon-intensive debt remains an important feature of global fixed income markets, accounting for 29.5% of total non-financial corporate debt, and in aggregate would surpass the size of any other non-financial sector.
- Carbon-intensive debt securities tend to be larger with a longer tenor and attract higher credit ratings than other non-financial corporate debt.
- Over half of carbon-intensive debt (US$3.2 trillion) is set to mature before the end of this decade, with global fixed income markets needing to refinance approximately US$600 billion each year.
- The share of emerging markets in annual issuance of carbon-intensive debt has increased from 4% in 2000 to 41% in 2022, and emerging markets now account for a third of the outstanding debt.
- Green debt plays a limited role in carbon-intensive sectors, accounting for 7.7% of the sectors’ total outstanding debt, and they are mainly concentrated in Electric Utilities and Autos.
Points of differentiation
- This research provides comprehensive analysis on debt issuance in carbon-intensive sectors, focusing on 7.76 million debt securities that were issued between January 2000 and June 2023. We analysed the key characteristics of carbon-intensive debt markets, covering a wide range of topics including currency denomination, credit rating, issuer types, sectoral and geographical distributions.
- We used an algorithmic-based graph approach to systematically classify and aggregate debt securities across complex ownership structures. Overall, this approach allows us to identify an additional 84,238 carbon-intensive debt securities with a total cumulative principal value of US$3.3 trillion.
- We provide analysis on the maturity profile of carbon-intensive debt, and discuss the recent trends and opportunities in carbon-intensive debt refinancing. Identifying the gap between green debt and carbon-intensive debt, our analysis highlights the potential opportunity for rapid growth in labelled bonds, including in the transition-themed debt market and sustainability-linked bonds.
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