Fixed income investors have limited chances for engagement at the board and senior management level, with interactions more common with the chief financial officer and/or group treasury. While these are senior positions within the firm, they usually have a more limited scope of influence that exclude the key strategic factors that are influential to ESG investors. Therefore, traditional engagement approaches are unlikely to deliver the type of results that large equity investors can achieve.
Debt financing has become increasingly important to many firms, especially as borrowing rates remain at or near record lows. Lending arrangements, either via the bank channel or financial markets, are characterised by defined loan terms and covenants to manage risk for the lender. As these arrangements approach maturity, issuers usually seek to renew or refresh these facilities, providing a clear opportunity for fixed income investors to engage. Indeed, a recent report published by the UK Treasury identifies this an ideal catalyst for engagement.
The challenge for fixed income investors is in picking the timing of these engagements. In the large and efficient global capital markets, a new bond offer can be opened and completed in a few short days. Nevertheless, if a large enough group of existing lenders band together, they can seek to improve ESG disclosures or acknowledge ESG risks as part of the refinancing process. However, this requires the tenuous assumption that several funds management peers/competitors can be sufficiently aligned on key ESG issues to present a united front to the issuer.
Even if an issuer is unwilling to consider changes in the actual bond documentation, lenders can advocate for corporate governance and sustainability policies to be given additional prominence in marketing collateral as a demonstration of accountability and transparency. Disclosure requirements for companies continue to be strengthened, with reporting against the Taskforce for Climate-related Financial Disclosures framework now mandatory for UN PRI signatories.
While disclosures and transparency are important, fixed income investors can turn information into action. Often grouped under the “green bond” moniker, there are now many examples of issuance designed to fund specific social as well as environmental projects. For example, banks, including ANZ, have issued bonds that link deployment of funds raised to projects that will support progress towards the UN Sustainable Development Goals. Progress reporting and impact assessments are built into the offering documents, so investors can be assured that funds are reaching where they need to be and that they are achieving tangible results.
As part of Daintree’s engagement with ANZ on its SDG bond issuance (of which we did participate), we sought to understand more about the credit review process for renewable energy projects. In particular, we wanted to ensure any project under consideration was assessed without requiring government subsidies. This was important to us because finding political consensus on this issue remains elusive, and we did not want to see projects derailed simply due to a change in the political winds. This relatively simple act allowed our investors, albeit indirectly, to contribute to positive progress on this key issue.
Engagement can take many forms. In fixed income, engagement involves taking a more opportunistic and nuanced approach. Concurrently, fixed income managers are taking increasingly confident strides when it comes to green and sustainability-linked lending, demonstrating an advantage to action over their more activist and opaque equity counterparts.
Daintree continues to advocate for more data, more accountability and more transparency because with this comes benefits for all stakeholders. We believe that “responsible investing” will transition from a fast-growing niche to mainstream over the medium term.
Brad Dunn, senior credit analyst, Daintree Capital
