Factors determining the effectiveness of engagement

Size of the investor

Larger investors typically find it easier to gain access to issuers, even in cases where they don’t currently hold any of the issuer’s debt. Smaller investors can potentially address this challenge by seeking collaborative engagements with equity holders and/or other bondholders, and using engagement approaches that emphasise partnership, common goals, and opportunities for companies to obtain consultative feedback on their existing efforts.

In principle, high-yield issuers are more likely to be receptive to engagement by bondholders, and open to negotiate the terms of the issue, as they have a greater incentive to meet (potential) investors’ requirements. For investment-grade issuance, investors sometimes find that there is less time to engage pre-issuance, as bond issues are announced and sold in a matter of hours. However, this does vary.

• PIMCO for example, finds that engagement in high yield can actually be more challenging than with investmentgrade issuers, as the former often do not have the investor relations set-up to address investor needs and lack internal CSR teams.
• Neuberger Berman’s Emerging Market Debt team, on the other hand, has found that emerging market corporate issuers are willing to engage with bondholders. Given the risk profile of these issuers, the broader points about the better pricing of risk by engaging with issuers, and the potential to mitigate risk during the hold period, are even more important for such companies. The firm prioritises its engagement efforts with high-yield credit where issuers have less balance sheet flexibility to absorb unexpected deterioration in their businesses due to material ESG risks.

Public versus private placement

If the debt issuance is privately placed, the investor is more likely to have direct engagement with the prospective issuer both pre- and post-issuance. Moreover, investors often see engagement over ESG factors as incrementally more significant in private debt, given the illiquid nature of these markets, and the importance of assessing the private equity sponsor’s commitment to ESG alongside the fundamental ESG risk of the underlying issuer.

Whether the issuer is looking to (re) issue debt imminently 

Companies that refinance regularly are likely to be more sensitive to interest rates and investor demand. They should therefore be more open to engagement by investors.

State of the market

Market situations of weak supply, the search for yield, and faster-moving primary markets can also lead bondholders to compromise more on covenants, particularly further down the credit curve. As interest rates rise, borrowing becomes more expensive and issuers should be more willing to engage with investors.

Relative awareness of issuer ESG issues

While some companies dedicate a great deal of attention to ESG issues, others take them less seriously. Engagement with leaders may be easier as they develop dedicated ESG resources, while laggards may be reluctant to engage. Nevertheless, this should be seen as an opportunity to effect a positive change and a crucial part of engagement is to involve the right person within the organisation.

Regional and cultural differences

There are historic reasons why some issuers are more receptive than others to engagement, as well as differences in legal or regulatory frameworks, policy differences, market size and corporate cultures. Anecdotally, investors in smaller markets outside North America and Europe have reported the relative ease with which they can collaborate with fellow investors to engage issuers on specific ESG issues.