Defining objectives and measuring the effectiveness of engagement in fixed income

Once the list of target companies has been defined, investors need to set objectives and track the outcomes of their engagement practices to ensure their effectiveness.

These objectives should be developed by ESG teams in collaboration with investment teams to ensure they are robust and send consistent messages to companies. Examples of objectives for target companies include:

developing a human rights policy;
setting up a whistleblowing monitoring system;
defining emissions reduction targets;
improving skill-set balance at the board level;
joining a multi-stakeholder initiative tackling a specific issue; and
increasing information provided to the market on ESG matters.

Investor	Highlights
Neuberger Berman, Investment Manager, US	Neuberger Berman prioritised its engagement efforts with non-investment grade pharmaceutical issuers based on: Assessing historical practices related to pricing of medicines; Determining management’s willingness to modify historical practices and our ability to track these modifications; Assessing the degree of regulatory risk associated with pricing practices and portfolio composition; and Determining the sustainability of cash flows available for debt service if current pricing activities remained ongoing.
PIMCO, Investment Manager, US	PIMCO prioritised its engagement with the European utilities sector based on: Understanding firms’ planning around two degree policies; Assessment of stranded asset risk in their planning assumptions; and Plans to issue purpose bonds (green, SDG, social), given that utility companies offer scale and existing internal capabilities for green projects.
QIC, Investment Manager, Australia	QIC identified the following material ESG issues as primary objectives for its engagement with an Asian automaker sector issuer: Clean tech opportunities: fleet emission reduction targets and associated clean tech product development (e.g. biofuel and hybrid vehicles); Labour relations: sensitivities in labour/management relations and strategies to improve relationships; and Governance: structures to achieve optimal balance across key stakeholders.

Investors will find it useful to define milestones and timelines at the start of engagement, although they will need to continuously review these to reflect internal and external developments during dialogue with target companies which often lasts several years. Measuring performance on specific ESG performance indicators and scores is a common way to assess success.

Tracking systems would facilitate record keeping, on a progressive basis, in the following areas:

interactions (i.e. letters, emails, meetings and on-site visits);
corporate representatives met;
information and documentation received;
commitments from management; and regular assessments of ESG performance.

While this information is usually kept internal and confidential, such systems are useful for preparing reports for clients and the public on the progress and results of engagements. Engagement dialogue can be tracked through tailored, preferably cloud-based, IT systems or customer relationship management (CRM) tools, available across the organisation, from ESG analysts to portfolio managers.

While setting milestones to measure objectives is useful, this might not always be possible for each engagement dialogue and success should always be contextualised; having all milestones covered does not necessarily mean that dialogue cannot be improved. On the other hand, missing milestones might lead to perceived failure and a reluctance by investors to take on difficult issues where progress is not guaranteed or measurable. As a matter of fact, recording the details of an unsuccessful dialogue with a company can be extremely insightful from a ESG integration perspective.