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    Impact bond market faces shake-up in 2023

    Impact bond market faces shake-up in 2023

    11 January 2023 Responsible investment
    The UK has made good progress in reducing emissions so far, but challenges lie ahead.
    • The UK’s progress on reducing emissions has been strong to date relative to G7 peers, but maintaining this momentum is likely to be challenging given the need to cut emissions from sectors such as property and manufacturing, where emissions reductions have so far been limited.
    • Key policy gaps in the UK include the need to address energy inefficiency in homes, aviation fuel emissions, and fossil-fuel supply and subsidies. Carbon pricing will need reform, as will policy to address the impact of net-zero targets on different UK industries.
    • The UK government’s recently published Independent Review of Net Zero points to economic opportunities being missed today because of challenges such as skills shortages and inconsistent policy commitment. Addressing these gaps is seen as imperative to maintaining the UK’s competitiveness in a shifting global economy. The UK’s progress against its net-zero targets is an issue of key importance to investors, both in terms of direct climate-related investment risks and alignment of financed emissions with investors’ own net-zero targets.
    • The UK’s journey towards net zero could have a direct impact on whether defined benefit pension schemes can achieve their net-zero targets. With large allocations to UK gilts, the progress of many pension schemes towards net zero will be closely tied to the UK’s progress. Larger schemes will be required to report on their portfolio emissions, of which UK emissions will likely be a large part.
    • Engagement with sovereigns can present unique challenges for investors, but Insight has sought to engage with relevant UK bodies to highlight our concerns around its progress towards net zero. Given recent developments we have downgraded green gilts within our impact bond assessment framework (from dark green to light green) and are looking for further opportunities to engage on these issues.

    Many pension schemes are beginning to express concern that policy inaction by governments may jeopardise their ability to achieve net-zero targets within their own portfolios because of high exposure to sovereign bonds – despite progress in other asset classes. Insight has been engaging regularly with the UK government, including the Debt Management Office (DMO), on issues including this.

    Insight’s most recent engagement with the UK DMO on low-carbon policy related to the green gilt issuance programme and topics relating to the government’s wider net-zero strategy.

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