PM Spotlight: A Natural Fit to Manage Sustainable Portfolios

Alex Temple is a senior portfolio manager and the head of Credit for Allspring’s Global Fixed Income team. His expertise in sustainable finance makes him a natural fit to co-manage Allspring’s climate transition credit strategies.

Q: How did you end up in portfolio management after studying engineering in university?

A: I’d been interested in computer programming since I was quite young and then studied mechanical engineering at University of Bristol. I started my career as an IT consultant, working for several different banks, which sparked my interest in fixed income. That led me to the interest rate swap trading desk at Merrill Lynch in 1999. I found the trading desk to be quite a vibrant place, and I learned quite a lot about the fixed income markets—how to simultaneously watch the headlines while pricing trades and working with the sales force. From there I moved to European Credit Management, a credit boutique and predecessor firm of Allspring, and I’ve been on the fixed income team with the firm ever since.

It’s been an interesting journey, especially working through the dot-com bubble, the Global Financial Crisis, the eurozone debt crisis, and more recently the COVID-19 pandemic. That’s taught me the importance of looking for good opportunities in even the most challenging environments and also of trying to understand how investors are likely to behave in stressed markets.

Q: How has your role evolved to also encompass sustainability? 

A: My team has always had a strong focus on governance—from knowing management to avoiding companies with an overly complex financial structure. Several years ago, we expanded that focus with our Climate Transition Framework. It’s now recognized as a market innovator and was recently shortlisted in the prestigious Pensions Age Awards for the Innovation Award. Around the same time, I decided to take a more formal approach to sustainability and completed a program in sustainable finance through Cambridge University.

Allspring’s approach to sustainability is to look for the risks and opportunities that climate change presents and focus on companies transitioning to a net-zero emissions economy. The Climate Transition Framework helps us identify companies that are leaders and those that are laggards.

Allspring’s approach to sustainability is to look for the risks and opportunities that climate change presents and focus on companies transitioning to a net-zero emissions economy.

Q: Can you give an example of how the framework has helped you make portfolio management decisions?

A: Our Climate Transition Framework has been very helpful navigating difficult periods such as Russia’s invasion of Ukraine when energy prices surged globally. The framework helped us identify big energy consumers, which was critical to navigating that environment. It’s really an additional source of intelligence. I think it's very hard to look at any market today and say that it hasn't been impacted by climate change, so these are additional tools that help navigate what continues to become a more challenging world from a climate perspective.

Many of our clients have particular sustainability objectives, so we’ve made our strategies flexible to meet different needs. That ranges from exclusions through to engagement with companies to support change. A key part of our sustainability work is reporting, because our clients want to see and demonstrate the sustainable characteristics of the funds to their own stakeholders. We use proprietary scores as well as ratings from providers such as Sustainalytics and MSCI.

Our Climate Transition Framework has been very helpful navigating difficult periods such as Russia’s invasion of Ukraine when energy prices surged globally.

Q: One of the most important yet challenging aspects of sustainable credit investing is the choice of benchmark. How should investors approach this decision?

A: It is a key decision, as it can impact performance significantly—positively or negatively. So, while we have the flexibility to use a variety of specialized indexes, such as a green bond index or a dedicated third-party transition benchmark, our research shows that specialized indexes tend to underweight sectors and companies that we believe are key to a successful transition.

Standard market benchmarks provide greater flexibility without restricting sustainability and investment performance. For example, our suite of climate transition credit strategies are benchmarked against standard market indexes upon which we impose a carbon intensity cap, which takes inspiration from the European Union’s climate transition framework. The EU framework has a carbon intensity 30% below the benchmark, decreasing by 7% annually to reach net zero by 2050. That combination has garnered quite a lot of interest from investors.

Q: Where do you see opportunities, depending on whether interest rates decline or stay higher for longer?

A: Markets have bought into the narrative that rate cuts are coming. From a sector perspective, we believe real estate would benefit, as lower yields would help with refinancing and generally with sentiment across the sector. We also see rate cuts as more likely in Europe compared with the U.S., given the relative strengths of the economies. The European economy is improving, but it's improving from a lower base. We see the sweet spot at the intermediate part of the yield curve, which could outperform other parts of the yield curve when rate cuts come through.

Another area where we see opportunities is in the higher-yielding parts of the market. BBB-rated and high-yield bonds could benefit from yields coming down versus staying higher for longer as issuers that have been locked out of the market refinance their capital structures. We had been overweight financials which traded at a discount to corporates, with the spread between the two being as wide as 60 basis points (bps; 100 bps equal 1.00%), although that has now compressed back toward flat and we are looking to reduce the overweight.

One thing for sure is that the end of financial repression and low yields heralds a new dawn for fixed income investors and especially active investors like us. Coupling the favorable investment backdrop with a sustainable approach to the challenges and opportunities that the path to net-zero presents makes for a very compelling investment case.

The ratings indicated are from Standard & Poor’s, Moody’s Investors Service, and/or Fitch Ratings Ltd. Credit-quality ratings: Credit-quality ratings apply to underlying holdings of the fund and not the fund itself. Standard & Poor's rates the creditworthiness of bonds from AAA (highest) to D (lowest). Standard & Poor's rates the creditworthiness of short-term notes from SP-1 (highest) to SP-3 (lowest). Ratings from A to CCC may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the rating categories. Moody’s rates the creditworthiness of bonds from Aaa (highest) to C (lowest). Ratings Aa to B may be modified by the addition of a number 1 (highest) to 3 (lowest) to show relative standing within the ratings categories. Moody’s rates the creditworthiness of short-term U.S. tax-exempt municipal securities from MIG 1/VMIG 1 (highest) to SG (lowest). Moody’s rates the creditworthiness of short-term securities from P-1 (highest) to P-3 (lowest). Fitch rates the creditworthiness of bonds from AAA (highest) to D (lowest).