Navigating the Sustainability Shift: A Challenge for Fixed-Income Investors

Research Paper
June 12, 2024
Preview
Fixed-income investors face challenges balancing fiduciary responsibilities with sustainability commitments, requiring strategies to manage liquidity, tracking error and high trading costs. MSCI's glidepath-index methodology helps investors transition bond portfolios towards sustainability goals by reinvesting cash flows into issuers aligned with specific objectives, such as higher ESG ratings or lower emissions. Historical simulations of the glidepath methodology demonstrate significant improvements in ESG scores and emissions reductions across various fixed-income segments, including high-yield and investment-grade bonds.
Glidepath mechanics
The exhibit illustrates the distribution of cash flows into different deciles based on certain criteria. Here is a detailed description:


1. **Cash Flows Sources**:

   - **Coupons**: Represented by a blue box on the left.

   - **Redemptions**


2. **Cash Flows Distribution**:

   - Both Coupons and Redemptions flow into a central box labeled "Cash Flows".


3. **Decile Allocation**:

   - The Cash Flows are then distributed into ten deciles (Decile 1 to Decile 10).



4. **Deciles 1-6**:

   - Receive all the cash flows.

   - Increase in weight over time.

   - New bonds are scaled (1.5 - 0.6) into the strategy based on the decile ranks.



5. **Deciles 7-10**:

   - Receive no cash flows.

   - Decrease in weight over time.



This visual representation helps in understanding how cash flows are allocated and managed across different deciles based on their performance and criteria.

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Sustainable investing often necessitates reducing portfolio emissions. But adding emission-reduction targets requires a careful navigation of market complexities and risk considerations alongside sustainability objectives. Could using a climate glidepath help?

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