LSEG Insights

Tracing carbon-intensive debt in corporate fixed income

Alan Meng

Sustainable Fixed Income Research Lead

Jaakko Kooroshy

Global Head of Sustainable Investment Research

Naman Sharma

Senior Data Scientist

Nitish Ramkumar

Senior Research Lead, NLP and Data Science

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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