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Alternative Market Briefing

Climate risk puts pressure on bonds, debt portfolios

Wednesday, December 01, 2021

Bailey McCann, Opalesque New York:

New research from MSCI considers the potential impact of climate risk on bond portfolios as well as private equity and private debt investments. The findings show that while climate policies may not have had much of a material impact on markets so far, they could in the future. Aggressive policies designed to keep warming at 1.5°C or even a more lax approach which allows warming up to 3°C could impact corporate-bond portfolios and their credit spreads could widen to more than double the current historically narrow levels.

MSCI also partnered with Burgiss to examine the carbon-emission intensities of the companies in private equity and private debt portfolios finding that portfolios including distressed assets often had a higher carbon-emission intensity.

The findings provide important context for investors, especially those that operate within an ESG framework.

Climate risk is underpriced in the bond market

According to MSCI, bondholders are pricing in some level of credit risk - especially for credits associated with carbon heavy industries like utilities and energy. However, bond markets are lagging behind equity markets when it comes to pricing in significantly higher climate risk such as warming to 3°C or the impact of climate policies that might seek to restrict or change the activities of emissions heav......................

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