Murray Ackman: Understanding carbon measures in fixed income

Carbon metrics play a growing role in fixed income portfolios, but the headline numbers are often only telling part of the story. Pendal’s MURRAY ACKMAN explains

• The value of carbon data in bond portfolios
• What the headline numbers are really revealing
• Find out more about Pendal’s Responsible Investing capabilities 

CARBON numbers have become a staple of investment reporting. In fixed income, though, the headline figures can hide as much as they reveal.

Carbon metrics are now firmly embedded in how investors think about climate risk.

From portfolio reviews to net zero reporting, simple numbers like Weighted Average Carbon Intensity (WACI) are increasingly expected across asset classes.

But in fixed income, those familiar figures don’t always behave the way investors expect.

That doesn’t mean carbon data has no value in bond portfolios. It does mean the numbers need to be read with care.

One of the biggest differences lies in who bond investors lend to. Fixed income benchmarks typically include large exposures to governments and semi government issuers.

These entities don’t earn revenue in the same way as companies, which makes standard carbon intensity calculations difficult, and sometimes impossible, to apply.

The practical result is that a meaningful part of many fixed income portfolios is often excluded from headline carbon metrics.

What looks like a portfolio-wide figure may, in reality, reflect only a subset of holdings.

Comparisons between portfolios can end up saying more about what’s been left out than about climate risk or emissions outcomes.

Data gaps add another complication. Many bond issuers are unlisted or privately owned and face fewer disclosure requirements than listed companies. Carbon data coverage is therefore patchier in fixed income.

Where data is missing, issuers are commonly excluded and the remainder scaled up. This can give a small number of holdings an outsized influence and make reported numbers less stable over time.

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Even where data exists, the way carbon intensity is calculated can produce counter intuitive results.

Revenue based measures can swing sharply when revenues change, and scaling partial data up to a single number can create a sense of precision that the underlying information doesn’t really support.

Fixed income also has features that issuer level carbon metrics struggle to capture.

Use of proceeds bonds, such as green, social and sustainability bonds, allow capital to be directed to specific projects, often with ring fenced financing and dedicated reporting.

Yet conventional carbon metrics typically ignore how proceeds are used, treating all bonds from an issuer the same. A bond funding renewable energy can therefore look no different, from a carbon perspective, to a standard corporate bond.

Parent company mapping can further distort outcomes. When issuer level data isn’t available, some datasets apply emissions from a parent group instead.

In fixed income, this can overstate carbon exposure, as investors are lending to a specific issuing entity, not the wider group.

What this means

Carbon metrics still have a role in fixed income, but they work best as part of a broader conversation.

Coverage matters. So does transparency about what’s excluded, whether portfolios have been reweighted, and how data gaps are handled.

Looking at allocations to sustainable labelled bonds and understanding where capital is actually being deployed can provide more useful insight than a single headline number alone.