Asset owners who want to keep global warming below 1.5 degrees Celsius (1.5°C) have a tough row to hoe.

Climate indexes tend to have a lower weighting (relative to parent indexes) allocated to companies in the emission-intensive energy, utilities and materials sectors. Did these indexes underperform in the year to date, given high recent energy prices?

As corporate-bond investors embrace decarbonization as a goal in portfolio construction and management and benchmark selection, the question arises whether decarbonization targets are at odds with other desirable index attributes, such as liquidity.

Can managers take an active approach to systematically managing exposure of a corporate-bond portfolio to climate-transition risk? We investigate two different approaches to decarbonizing credit portfolios.

In this paper, we highlight to investors and portfolio managers the significance of climate-change risk for the value of corporate bonds, as well as provide a framework for further research in this area.