In this Green Dream video interview, Henrietta Pacquement, head of the global fixed income team and head of sustainability at Allspring Global Investments, answers questions on criteria for impact bonds and challenges and opportunities for fixed income in the year ahead.

Watch the full video interview above and read the transcript below.

NK: Hello, I’m Natalie Kenway. Welcome back to the Green Dream. Today, I’m joined by Henrietta from Allspring. Thank you very much for coming into the studio to see us today. Can you tell us a bit about your role, what you do?

HP: Thank you. Delighted to be here today. I’m on the portfolio management side and on the fixed income side. I’m based in London and work for Allspring and fixed income is one of our specialties. On top of that, I head up sustainability for Allspring as a whole, and I think that’s quite a differentiated approach because it really ensures that we have an integrated process from a sustainability perspective.

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NK: Okay, fantastic. And what would you say was a key focus for you in 2023 for the fixed income team, were there any particular themes? And will these continue into 2024?

HP: We saw a big repricing of the fixed income markets over the course of 2022. As a result, over the course of 2023, we saw a lot of investors look at their fixed income allocations and rethink them and reallocate to certain areas of the fixed income markets. And what we also saw is investors, having done maybe a fair amount of work from a sustainability perspective on the equity side, now looking to see what they can do from a sustainability perspective in fixed income. That has really been a topic of discussion with prospects and clients and how they can shape their portfolio from a sustainability perspective to take on board topics like climate, for instance?

NK: Thank you. And I think you touched upon green bonds moving from niche into the mainstream and we’re also seeing the emergence of impact bonds now. Is this something that you’re looking into a bit more?

HP: It’s been really interesting to see how that part of the market has evolved over the course of this year. We have seen a growing market on the green bond side. It’s not just in terms of size, but also in terms of diversification from a sector perspective and also from an issuance perspective. That’s important for investors when they’re looking to build balanced portfolios.

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Two evolutions that we’ve seen as well, is it still is a reasonably small market compared to the broad credit markets. We are seeing investors looking further afield and looking not just at what projects companies are putting together to feed the green bond market, but also what their overall strategy is from a climate perspective.

I think that’s a really interesting discussion to have with clients – how are they looking to assess where a company is at from a climate perspective, where they are going over the next few years, what’s their strategy, what’s their asset base, and how adapted it is to the changing environment and transition on one side, physical risks on the other. So we spent a lot of time developing a climate transition framework that really allows our portfolio managers to understand where a company is going. We don’t just look at green bonds. We’re also looking at the issuers themselves and what their journey is from a climate perspective.

You mentioned impact bonds. Yes, it is an area of interest, but it’s a challenging one. Why? Because of what ‘impact’ means. You need to have three criteria, we think, to qualify as an impact bond. One is we need to have a notion of intentionality – so what are your ex-ante targets to justify your impact bond? You’ve got a notion of measurability – how are you measuring the impact that you have? And the final one as well is additionality – it needs to be financing that wouldn’t be there otherwise if that bond wasn’t issued. And that is actually quite a high hurdle for bonds to meet.

NK: Okay, great. Before Christmas we had COP28, a chance to reflect on the progress we’re making, or lack of. What do you think we need to do from a financial services point of view to ensure that we’re achieving the finance climate agreement goals?

HP: COP is always an interesting time because it allows us to really have a view of what’s going on and a progress report. And we had that at the end of the end of last year. And from our perspective, we know what the headwinds are. If you look at greenhouse emissions, in 2022 they went up. We expect when the final numbers come out for 2023, we will have a similar trend.

If you look also in terms of temperature alignment, the estimates may be 2.8 degrees by the end of the century. That is way above the one and a half degrees that we’re targeting. So we know there’s a lot to do still at this point. That being said, it’s been interesting to see some of the tailwinds, that we’re seeing from a climate perspective.

If you look at the highest emitters, about 80% now have net-zero pledges – that’s progress. If you look back at COP21 in 2015, temperature alignment at that time was actually four degrees. We have made progress in that in that space, but clearly not enough. And it’s not just in the sort of harder to abate sectors. It’s not just in the energy sectors, it’s also the financial sector. And that I think, is a message that came out as more needs to be done there. Be it in terms of loss and damage mitigation, be it in terms of funding the transition as well. And I think that’s really a message for me that came out strongly, is that we need more.

NK: What would you say is your outlook for growing fixed income this year? Where were the challenges? Where were the opportunities?

HP: We hope that some of the trends that we saw this year are going to continue into next year. And it’s been an interesting discussion there as well, is it more interesting to invest into the transition on the fixed income side, on the equity side? Well, actually, a lot of the funding for the transition is going to have to come from the fixed income markets and the credit markets in particular. And as bond investors, you have an opportunity to engage with the companies as they come to market and you have an opportunity to give feedback on what they’re doing, what their strategies are.

And so we’re hoping to see more of that, more investment in companies that are leading the transition and more investment as well, and time taken from an engagement perspective to help meet the goals going forward.

NK: Something we always ask on the Green Dream is what is your favourite sustainable drink or snack?

HP: That actually really got me thinking overnight because it’s a tricky question. It’s very hard to find a sustainable snack or drink. And the anecdote I wanted to bring up, there was a report a couple of years ago about the carbon intensity or carbon footprint of a latte coffee. It’s horrifying to realise it’s one and a half kilos. Why? Because you’ve got milk. Because you’ve imported your coffee and your cup. So it’s pretty surprising. So, I’ve gone for fruit off the tree because it tastes just different and in particular, oranges.

NK: Well, thank you very much for coming in and sharing your thoughts with us. Good to have you.

HP: Thank you so much for having me.