Integrating climate risks & opportunities into Systematic Active Fixed Income strategies
In this paper, we compare two systematic active fixed income (SAFI) strategies: a climate- and sustainability-aware investment grade (IG) corporate bond strategy (“SAFI Climate”), and a standard SAFI IG corporate bond strategy that does not incorporate any sustainability objectives (“SAFI”).
What follows is an excerpt of the piece; download the full document here, and hear more in our new video, here.
Considering climate—but not giving up alpha
Our analysis reveals the following:
- The US and the EUR SAFI Climate portfolios have nearly identical key characteristics to their standard counterparts in terms of rating, duration, yield, and other criteria.
- Integrating climate and sustainability screens into the SAFI framework has a negligible impact on risk-adjusted returns.
- The SAFI Climate Strategy is designed to have the same alpha potential as the SAFI Strategy, while, just like the standard SAFI Strategy, largely neutralizing systematic risk relative to the benchmark index.
This suggests that investors allocating to SAFI strategies can align portfolios with climate and sustainability objectives without compromising performance.
Introducing SAFI and the SAFI Climate Strategy
Systematic Active Fixed Income (SAFI) is a strategy that aims to outperform a fixed income benchmark index by systematically applying quantitative security selection signals. In the investment-grade credit markets, three signals are used in combination. They reflect relative value, momentum and sentiment factors and are updated every day for virtually all index constituents. Leveraging on our expertise in precise portfolio construction and efficient implementation, SAFI continuously looks to generate alpha by selecting issuers with high signal value while controlling systematic risk and thereby preserving the risk characteristics of the benchmark index.1
The SAFI Climate Strategy is designed to reduce carbon emissions and fossil fuel exposure relative to a market-weighted corporate bond index by reallocating capital towards companies better positioned to manage the risks associated with climate change. In addition, the strategy applies exclusionary screens based on adherence to certain international norms and product involvement criteria.
The SAFI Climate Strategy aims to achieve several key objectives relative to the benchmark across six categories of climate-related metrics (Figure 1). These sustainability objectives come in addition to the primary objective of delivering outperformance (alpha) over the benchmark. They are embedded into portfolio construction alongside the traditional SAFI security-level factor scores and multiple risk management considerations.
At its core, SAFI Climate targets key sustainability factors. For example, the SAFI Climate Strategy aims to minimize exposure to companies with high fossil-fuel related risks or those involved in severe environmental, social and governance (ESG) controversies. SAFI Climate also aims to overweight companies that demonstrate credible alignment with climate transition goals. Importantly, the SAFI Climate framework is adaptable and can be tailored to reflect specific preferences of asset owners.
Figure 1: Select metrics and targets for the SAFI Climate Strategy
| Category | Metric | Purpose | Target relative to the benchmark |
| Backward Looking | GHG Intensity CO2e emissions per $M revenues | Considers a company’s carbon emissions in relation to its output. | ↓≥50%* reduction relative to the benchmark, with an annual 7.5% year-over-year reduction versus the benchmark in effect in 2030, with the aim to be aligned by 2050. |
| Fossil Fuel Reserves Embedded CO2e Emissions (MTCO2) | Connects a company’s operations to the risks of stranded assets and associated potential write offs. | ↓ ≥75% | |
| Brown Revenues % Revenues from fossil fuel-related activities | Measures exposure to activities associated with the extraction and direct use of fossil fuel sources, as well as supporting activities. | ↓ ≥75% | |
| Forward Looking | Carbon Risk Rating Score on climate preparedness | (A bottom-up measure). Assesses climate risks and opportunities including their carbon footprint, and the management of their industry-specific carbon risks. | Remove bonds scored 24 or lower (climate laggards)† |
| Product & Norms-Based | Sustainability Risks
|
Norms-based, controversy risk and controversial product involvement screening. Sustainable Investment (SFDR) monitoring. | ↓ 100% for controversy & product involvement where data is available. A minimum of 25% for sustainable investments, according to SFDR criteria |
| Labelled Bonds | Green Labelled Bond Bonds that qualify as green according to the Climate Bonds Initiative Taxonomy and database | Increases the share of investments into projects with specific environmental objectives. | ↑ ≥1.5x‡ |
Source: State Street Investment Management. As of December 31, 2024. * The framework applies “zeros” for carbon intensity, brown revenue and fossil fuel reserves metrics associated for bonds identified as green bonds. † Carbon risk rating is based on the ISS rating methodology. See Carbon Risk Rating | ISS. ‡ The aim is to increase the weight of green bonds in the strategy to 1.5x the benchmark weight. However, once the strategy exposure to green bonds is at 35% weight, any additional increase versus the benchmark weight would only be matched by the strategy, and not increased by a factor of 1.5x. The above targets are based on certain assumptions and analysis made by State Street Investment Management. There is no guarantee that the targets will be achieved. The portfolio is monitored against the targets on the rebalance dates and the portfolio may therefore deviate from the targets between the rebalance dates. State Street Investment Management reserves the rights to modify the targets.
Comparative analysis: the SAFI Climate Strategy versus the standard SAFI Strategy
To assess the practical implications of integrating climate considerations into systematic active fixed income strategies, we compare the SAFI Climate Strategy with a standard SAFI strategy that does not incorporate any sustainability objectives (“SAFI”), either in the USD or in the EUR market. The comparison is based on realistically simulated model portfolios. For the first step, we contrast the historical performances of the two strategies over several years. Second, we compare their characteristics in terms of broad risk exposures, sustainability metrics and sector allocation at a given point in time.
Performance analysis
The integration of climate and sustainability screens into the SAFI framework has had a very small impact on performance. Our analysis shows that the performance differential between the SAFI Climate and SAFI standard strategies was typically within ±10 basis points (annualized for the period from July 2019 to March 2025).2 This minimal deviation underscores the robustness of the SAFI model in delivering alpha, while aligning with sustainability objectives incorporated into the SAFI Climate framework. If you would like further details on the model and comparison characteristics, please contact the Fixed Income team at State Street Investment Management.
The ability to maintain portfolio performance while achieving meaningful sustainability alignment—such as reductions in GHG intensity, fossil fuel reserves exposure, and ESG controversy risk—demonstrates the practical viability of SAFI Climate as a core fixed income allocation. Investors can therefore pursue climate and sustainability alignment without compromising performance.
Performance attributions for both the SAFI Standard IG and SAFI Climate strategies further validate the robustness of the process, with security selection, driven by scorecard signals, as the dominant contributor to returns rather than market beta or systematic risks.3
Read More About Integrating Climate into SAFI Strategies
Our piece provides performance data on the SAFI Climate versus SAFI standard strategies over a specified period and gives a detailed comparison of key characteristics (such as duration or yield) and sector weights (as of March 2025) between the SAFI Climate and SAFI standard strategies. The piece aims to provide greater understanding of how the integration of climate and sustainability considerations can be put into practice within a SAFI allocation.