Decarbonization in Focus: Schroders-hosted panel examined opportunities in public and private debt markets
Asset owners joined Schroders investment team members during Climate Week NYC 2025 to discuss how sustainability can be applied to fixed-income investments to support client goals and deliver better returns.
During Climate Week NYC 2025, Schroders hosted a panel discussion to examine the most pressing challenges and opportunities related to decarbonization within public and private debt holdings. Moderated by Marina Severinovsky, Schroders’ Head of Sustainability for North America, the panel featured Michael S. Davis (a Fixed Income Portfolio Manager at Schroders); Holly Turner (Sustainable Investment Lead and Climate Specialist at Schroders Capital); Anastasia Rotheroe (Principal Investment Officer-Head of Public Equities, State of Connecticut); and Han Yik (Senior Advisor and Head of Stewardship, NYS [New York State] Teachers’ Retirement System).
The panelists shared insights on measurement tools, engagement tactics and innovations in sustainability-linked lending, along with the need for greater transparency, adaptation and real-world outcomes.
Building decarbonization-focused bond portfolios is more nuanced than simple inclusion and exclusion
For fixed-income investors who have decarbonization as an objective, portfolios can be built along several fronts. Schroders’ US public credit team employs a proprietary decarbonization classification system that groups the opportunities in three categories. First, as the core of a portfolio, are the leaders in low-carbon strategies, the low emitters that are typically in sectors such as telecommunications, technology and health care. Second is the climate action group, which encompasses companies that have demonstrated, or explicitly expressed an interest in, realistic decarbonization. Finally, the team also includes leaders in high-emitting industries, such as chemicals, utilities and energy. Within this latter group, the investment team focuses on companies that have shown a willingness to engage. Discussions on issues such as how to improve disclosures and other topical opportunities can provide a glidepath to decarbonization for these firms.
Private markets also play a critical role, given that 70% of climate finance now comes from the private sector, and private credit could provide 60% of the capital needed to fund decarbonization.1 The size of the sustainability-focused private credit market is still only about $50 billion, while the number for private equity is $650 billion. But that suggests there is a significant opportunity for using private credit to support decarbonization as this asset class grows.
Schroders Capital believes there are multiple types of decarbonization outcomes. There is a portfolio-level focus, which constitutes optimizing a portfolio to deliver a low-carbon metric over time. There is also an aim to align investments with real-economy emissions reductions and support businesses as they transition over time. A third approach focuses on climate solutions, both by allocating capital to investments that avoid emissions through their products and services and by supporting efforts to remove emissions via nature-based or technological solutions.
Specific asset classes, such as real estate, infrastructure and private equity, lend themselves to different decarbonization strategies, and a total portfolio view is needed to combine these approaches effectively. In private debt, there is particular potential to support real-economy emission reductions and climate solutions, especially as technologies advance and more climate solution opportunities mature.
Mechanisms in private debt that support decarbonization include labelled loans and ESG-related loan terms (covenants), which are designed to incentivize positive outcomes, as well as continued environmental, social and governance (ESG) integration and active engagement, both of which remain important in the private credit space.
Asset owners agree that debt can be used to help high-emitting companies finance the significant costs associated with decarbonizing their operations. Importantly, portfolios that focus on bonds issued for this purpose do not have to be driven purely by ideology. They can be managed with the primary objective of delivering attractive returns, thereby contributing positively to the overall performance of a fixed income portfolio.
Assessments are being aided by standard industry frameworks and proprietary tools
Some of the industry-wide frameworks and tools used to assess sustainability in fixed income include the Bloomberg Cambridge University Corporate Bond Index, which screens bonds and issuers for climate alignment; the Green Bond Principles, which provide guidance for green bond issuance; and the Climate Bonds Standard, which certifies the environmental credentials of bonds.
Schroders approaches public market bonds by deploying both external and proprietary tools. The latter include SustainExTM, which helps quantify the environmental and social impact of companies; the Net Zero Alignment FrameworkTM, which assigns alignment scores to reflect how likely companies are to take positive action; and the Portfolio Emissions PathwayTM, which projects emissions based on corporate commitments.2
For investment-grade (IG) bonds, particularly in the US, having reliable third-party data and a high level of engagement can lead to positive outcomes, especially with companies in which the firm has both equity and fixed income stakes. Cross-asset ownership tends to facilitate more effective engagement on sustainability matters.
Schroders’ process for high yield bonds is more bespoke, given that issuers’ level of disclosure and their interest in decarbonization are often less than what is typical for the IG market. With high yield issuers, Schroders relies more on its proprietary tools and direct engagement. Often, that simply entails helping issuers understand what disclosure expectations are and what metrics will be used to evaluate sustainability. While the high yield market offers considerable opportunities for generating alpha, there are also opportunities for progress to be made with sustainability initiatives and for asset managers with a highly differentiated approach to stand out.
For private markets, Schroders Capital employs a three-step decarbonization framework that builds on the firm’s ability to make assessments from a multi-asset perspective. The first step is to look for an understanding of, and alignment with, the 1.5°C pathway and net zero objectives, using a maturity-scale metric approach to assess decarbonization compliance. The analysis evaluates both climate commitments and targets with wider climate efforts on governance and transparency of strategies. It aligns with both the Net Zero Investment Framework by IIGCC [Institutional Investors Group on Climate Change] and the Private Markets Decarbonization Roadmap by the Sustainable Markets Initiative and iCI (Initiative Climate International).
The second step is to examine the ability of an investment to decarbonize. Schroders is creating a research-based assessment to understand the limitations an investment may have. When possible, it analyzes whether there are limitations based on the sector or region in which a company operates. In the US, that analysis will also need to be at the state level. This step is particularly important when considering sustainability-linked loans. It is essential to understand what is feasible for the environment in which a company operates.
The third step is to look at climate solutions and identify investments that can contribute to real-world decarbonization. Schroders has an identification tool to determine and categorize investments with associated climate solutions. The tool compares international taxonomies and climate scenarios, assessing both mitigation and adaptation potential, to account for any differences in regional definitions of climate solutions.
Physical climate risk is becoming an increasing area of focus
Physical climate risk has become a much more prominent topic of discussion, with increasing attention from investors and boards. Perhaps because physical risks—such as hurricanes, tornadoes, wildfires and rising sea levels—are tangible and measurable, they provide a compelling reason for asset owners to engage with portfolio companies on climate issues, regardless of the broader political environment. Tools and custom mandates, especially in fixed income, are now being created with a focus on energy transition in response to these risks.
Physical risks and adaptation solutions now play a significant role in investment strategy and measurement, particularly for specific asset types. Still, measuring the outcomes of adaptations [such as system hardening efforts designed to build infrastructure assets or operational systems that can better withstand extreme weather events] can be more difficult because there are not the clear metrics that mitigation efforts have to show the emissions that have been reduced or avoided. Advances are rapidly being made, and physical risk measurement is becoming more sophisticated with geospatial technologies. [These capabilities, such as satellite imagery and Geographic Information Systems (GIS), enable companies to precisely map, monitor and assess physical climate risks like floods, wildfires and extreme weather.] These advances will make it progressively easier to determine whether the adaptation measures that firms put in place deliver benefits such as reduced risk or lower insurance premiums.
For asset owners and managers, addressing these risks is becoming integrated into due diligence, engagement practices, and investment frameworks across public and private markets. The overall emphasis is on ensuring that portfolios are positioned not only for regulatory compliance or reputational benefit, but also for genuine economic resilience amid a changing climate.
Multiple examples demonstrate that sustainability can deliver substantial benefits—for issuers and investors
The panel highlighted a number of cases that illustrate the significant advantages that a focus on sustainability can offer to both issuers and investors. On the debt side, companies can obtain a reduction in their borrowing costs, as they are able to issue debt at rates that are 10 to 45 basis points lower than those available to companies without a sustainability emphasis.
In the public markets, a European utility that relies on renewable sources – wind, solar and hydro – has made a commitment to being carbon neutral by 2030. It has raised billions of dollars with sustainable green finance issuance. Over the past 10 years, the company’s stock has risen twice as high as its country’s benchmark index and the bonds have also performed well, indicating clear benefits for investors aligned with robust climate initiatives.
An apparel company that has committed to using only low-impact textile fibers by 2030 and has already achieved a 25% reduction in water usage has delivered notable results. Over the past 10 years, its share price has risen by 80%. It outperformed its benchmark index, which was up 60% over the same period. These efforts have generated positive outcomes for bond investors, as well, and the company’s performance has demonstrated the tangible value sustainability initiatives can bring.
While much attention is given to decarbonization, there is also a significant opportunity to address methane emissions, which, despite a shorter atmospheric lifespan than carbon, are far more damaging in the short term. For asset owners, engaging with companies—particularly in oil and gas—to reduce or capture methane has become increasingly viable, as existing technology enables cost-effective mitigation and even revenue generation from methane capture. By providing targeted financing, investors can support these efforts, delivering both attractive financial returns and real-world environmental impact. Such approaches exemplify a win-win scenario because they address climate concerns while also benefiting all stakeholders.
The impact investment manager BlueOrchard, a subsidiary of Schroders, plays a key role in advancing the firm's sustainability efforts. It has had particular success with its engagement practices for emerging market private debt. The firm uses detailed and iterative borrower questionnaires and often provides in-depth guidance to firms in regions with limited ESG regulations. The BlueOrchard team has helped these firms strengthen their ESG practices and climate commitments, while adapting methodologies to local contexts and recognizing the unique challenges related to decarbonization in many emerging markets. Insights from these engagements have helped refine Schroders’ overall alignment frameworks.
Attendees and panelists agreed about the need for real-world impact and greater transparency
The discussion included a question-and-answer session. One attendee wanted to know whether sustainability targets and capital expenditures by companies are systematically tracked over time. Schroders’ public credit team performs such assessments as part of quarterly credit reviews, during which analysts evaluate progress against key sustainability metrics and financial performance, although these targets are not strictly tied to holding or selling decisions.
Both the panelists and audience members agreed that sustainable investing needs even greater transparency and more outcome-oriented approaches that deliver not just portfolio-level metrics, but tangible economic and environmental results.
Endnotes:
- United Nations Framework Convention on Climate Change “Net Zero Financing Roadmaps,” as of November 2021
- Schroders’ proprietary tools are designed to enhance the research and evaluation process but do not guarantee favorable investment results.
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