Coastal flooding, wildfires, drought, ocean pollution, and threats to the world’s food supply require a global change to a more-sustainable way of life, says Fidelity’s John Houston, who says he’s targeting debt securities that could help companies and governments finance this transition.
“The debt markets are creating new opportunities for fixed income investors to earn attractive income by financing environmental projects and investing in issuers with practices I think are essential to building a long-term economy,” says Houston, co-manager of Fidelity® Environmental Bond Fund (FFEBX), which launched in June.
Along with co-managers Andrew Lewis and Jay Small, Houston invests at least 80% of the fund’s assets in environmental debt. The team’s objective is to seek high current income, mainly among investment-grade securities. The fund may invest up to 20% of assets in the debt of high-yield issuers.
The team attempts to manage the fund relative to the overall interest rate risk of the Bloomberg Barclays U.S Aggregate Index while seeking environmental exposure along the lines of the MSCI Global Green Bond USD Index.
Houston says the fund managers have the freedom to choose securities from a growing $1.4 trillion global market of green, sustainable, and sustainably linked debt, about 30% of which is issued in U.S. dollars.
In terms of projects, Houston says the fund tends to invest in bonds that finance wind farms and other green energy production, pollution control efforts among industrial firms, and government-led sustainability initiatives.
The fund also owns corporate and government bonds the team believes offer potential for attractive returns on a risk-adjusted basis from issuers that score well on sustainability measures and make commitments to environmental targets, such as reducing carbon emissions.
These types of “environmental leader” companies and governments seek to improve energy efficiency, sustainable agriculture, clean transportation, water management, and environmentally friendly technologies, according to Houston.
“We’ve put Fidelity’s extensive research capabilities to work finding high-quality issuers and sound projects that are setting the pace for global environmental improvements, and I feel really good about our team’s work,” he says.
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