Engaging issuers

Engagement is common practice among shareholders as a way of discovering ESG information and influencing a company’s governance or sustainability. It is less common among fixed income investors, undoubtedly due to a lack of voting power and the position they hold in capital structures.

For longer-term or buy-and-hold style investors, engagement isn’t just about correcting faults; they should also encourage best practices via engagements. In some cases, investors may share knowledge from across their portfolio to support better management of ESG risks to help this process. Solveig Pape-Hamich, vice president at KfW, says, “firstly, we can tell them, ‘we would have liked to invest more into your bonds, but we were not able to for sustainability reasons.’” Marion Marinov, senior manager of asset allocation, adds, “the best ones get a letter as well. We tell them, ‘we really like the fact that you have good sustainability performance, but you might be overtaken next month when the others improve.’”

Why engage?

• To source ESG data
• To identify and measure credit risks that are otherwise difficult to evaluate
• To gain a better understanding of how an issuer is managing, or plans to manage, ESG risks
• To influence how issuers manage exposure to major risks
• To influence standard terms and content of bond documentation such as covenants

“We really see upside in companies that improve on ESG criteria. It’s very interesting to see where positive changes are being made that are not discounted yet in the value or the spread of a company.”

Edith Siermann, Robeco

What makes engagements successful?

Engagement is a long game; fixed income investors will build credibility with issuers by being consistent in their engagements and monitoring their progress over time. Successful engagements will typically last at least one year.

The effectiveness of engagements will depend on the strength of the relationship between the issuer and investor. This, in turn, depends on originators, whether the investor purchased the bond directly from the issuer or another investor, and the proportion of a bond that the investor holds. Other variables include current market demand, issuer credit quality and region.

Overloading issuers with enquiries about ESG may be counterproductive. Ensure that questionnaires are succinct, and source data from ESG research providers where possible.

Practicalities of engaging issuers on ESG issues 

Who should conduct engagements?

Depending on whether the engagement is conducted to gather ESG information or to influence issuer behaviour:

• Fixed income analysts
• ESG analysts
• Portfolio managers
• Internal engagement specialists
• External service providers

How to prioritise engagements and engagement resources

Engagement can be resource intensive, so it is important for investors to prioritise engagements based on:

• relative ticket sizes in an individual bond or total volume of holdings;
• the severity and materiality of the ESG-related risks involved;
• ESG concerns where investors expect to have the most impact.

Who to engage?

Corporates

Engagements can be addressed to senior management staff such as chief financial officers, legal, investor relations, health and safety and corporate responsibility staff.

“Meetings with corporate issuers also tend to be a good source of information for the sovereign analysis. If they don’t have an answer on ESG risks, that’s also very telling.”

Gorky Urquieta, Neuberger Berman

Governments

Engagements vary considerably depending on the scale of the investor, the engagement opportunity and the issuer’s willingness to meet with investors. PRI signatories have stated that they engage government officials, including senior management from treasury departments and government agencies (e.g., the US Environmental Protection Agency), debt management offices and export credit agencies. (There is a fine line between engaging and lobbying government officials or influencing public policy. Some investors consider engagement with government issuers as either impossible or inappropriate.)

“Namibia is a relativ%ely well-rated country, but about 82% of its electricity comes from high-polluting power stations in Zimbabwe. Our portfolio management team met with their grid operator, Nam Power. Those are the people we need to talk to and say: Are you open to green energy?”

Michael Schneider, Deutsche Asset & Wealth Management

How and when to engage?

Upstream

Although the window for engaging issuers upstream is often small, it is also the time when bondholders can have the greatest influence. Investors can engage pre-issue during fundraising road shows and corporate book builds. PRI signatories typically engage via phone calls, emails, letters, and in person at conferences and during investor roundtables.

Downstream

Post-investment, the relationship between bondholder and issuer becomes a contractual one and ESG considerations are unlikely to be a part of that contact. However, investors do retain some influence as potential future investors depending on their size. They should therefore consider engaging at quarterly meetings, in response to financial reporting, in conjunction with shareholder meetings and during country visits (with corporates and governments).

Sponsored by KfW and Union Investment