Prioritising fixed income engagement activities

Engagement cases usually fall into two categories:

Proactive: When investors seek dialogue with priority companies to manage more medium/long-term issues based on their analysis of potentially material ESG issues and megatrends.

Reactive: When investors initiate dialogue with companies in reaction to a recent downgrade, controversy or scandal which is presenting a financial and/or reputational risk.

PRI signatories typically prioritise their engagement activity based on one or more of the following criteria:

• Size of holdings: The largest holdings pose the greatest potential risk to portfolio performance.
• Credit quality of the issuer: Those issuers with less balance sheet flexibility (such as high-yield issuers) are typically less able to absorb an unexpected deterioration in their businesses due to material ESG risks.
• Duration of holdings: Investors should focus on debt instrument types that are most exposed to selected ESG factors over a given timeframe; for instance, emissions-reducing regulatory targets will likely not impact three- and ten-year bonds in the same way.
• Quality of transparency on ESG: Investors should focus on improving understanding of how an issuer is managing, or plans to manage, ESG risks and value creation opportunities in the absence of comprehensive and comparable issuer disclosure.
• Specific markets and/or sectors: Investors should engage over ESG issues that are most material for the specific market and/or sector. ESG sector materiality frameworks such as the Engagement Guide for Asset Owners and Asset Managers from the Sustainability Accounting Standards Board (SASB) can help focus engagement discussions on sustainability-related trends and uncertainties that are likely to affect the financial condition or operating performance of a company.
• Specific ESG themes: Engagement discussions should be focused on those topics representing the highest value at risk or potential impact across issuers and sectors. Investor engagements currently managed by the PRI include research and collaborative investor engagement on specific topics, such as the low-carbon transition, water risks, labour practices, cybersecurity, anti-bribery and corruption, and corporate tax transparency.
• Companies in the lowest ranks of ESG benchmarks: Such companies tend to face the highest financial downside, including significant event risks and systemic risks which can affect issuer creditworthiness.
• Companies in the highest ranks of ESG benchmarks: Conversely, investors may choose to engage with industry leaders to promote and encourage best practice. ¡ ¡ Specific issues considered priorities for the investor based on input from clients and beneficiaries: Investors should focus on ethical issues or issues misaligned with their clients’ purpose (such as endowment funds).