Tips for effective bondholder engagement

Some of these have been identified through interviews with and case studies provided by fixed income investors. Others relate to best practice engagement strategies outlined in a recent PRI listed equity publication – A Practical Guide to Active Ownership in Listed Equity – which can equally be applied to other asset classes, including corporate fixed income.

Developing a bondholder engagement strategy

• Review peer engagement policies, whitepapers and case studies.
• Decide where engagement fits within your organisation’s broader investment philosophy.
• Develop and communicate an organisation-wide engagement policy and strategy.
• Extend any existing equity engagement policy and strategy across corporate bonds.
• Draw on leverage derived from any stock ownership to conduct engagement that is fed back into fixed income research.
• Combine equity and fixed income engagement practices without ignoring the unique rights associated with the bond holdings.

Prioritising engagement

• Draw on internal and external ESG research and intelligence on target companies and their sectors to identify specific issues on which to engage.
• Decide how to prioritise engagements with issuers based on the resources available, percentage holding in the companies concerned, and the materiality of the ESG issues in question.

Initiating dialogue with the issuer 

• Invite fixed income practitioners to existing equity engagements that may already be underway.
• Make initial contact with the issuer’s board, executive members or investor relations. Leverage any existing relationships.
• Time requests appropriately. Keep in mind the company’s position in the business cycle and its current focus on certain issues when defining requests. 99 Focus on the link between ESG and credit risk and select the right indicators on which to base engagement tracking.
• Outline why issuers would benefit, for example through investor base diversification, a higher likelihood that investors participate in future issuance, lower cost of capital as a result of lower risk perception, management of regulatory and reputational risk.
• Explain how companies themselves need to help investors by providing public ESG reporting and proactively engaging debt investors on ESG matters.
• Encourage standards of ESG disclosure in fixed income based on broader market disclosure frameworks.
• Consider collaboration as means to maximise effectiveness and efficiency of engagement.

Conducting engagement discussions

• Demonstrate a holistic understanding of the company’s performance and strategy to clarify how both companies and investors are focused on attaining similar goals.
• Understand the corporate culture by considering a series of red flags/indicators that could signal a shift in risk: high turnover; discussions with board members and operational people; results of employee surveys; customer satisfaction; fines and penalties; and incentives/remuneration.
• Present a consistent and integrated message from ESG analysts and portfolio managers, both of whom should join meetings with companies.
• Where possible, align requests with international standards to address companies’ concerns about receiving varying and detailed questions from ESG specialists.
• Build on and foster on-going relationships, show persistence and consistency in approach, and listen and be open to what management is saying, rather than simply ask and monitor.
• Be sensitive to cultural differences; whenever possible, speaking the local language is an advantage.
• Arrive prepared and provide feedback. Enter an engagement with a clear agenda, having reviewed financial and sustainability performance data in-depth and having talked to experts beforehand. Bring ideas and expertise to how a problem can be solved to provide value for the organisation in question.
• Share best practices. Speak with leading companies to identify best practices they can refer to and share with peer companies that are lagging behind. It is easier to give examples of peers that have achieved the change being sought, rather than asking the company to be the first.
• Praise positive practice. Positive engagement is very cost-effective as it helps ensure performance is maintained.
• Collect feedback from local experts, government representatives and other stakeholders.

Following up on engagements

• After meetings, jointly approve a confidential summary of the discussion and commitments made. Seek feedback on the quality of the meeting and use it to improve subsequent engagements.
• Use clear evaluation methodologies to help guide dialogue with the target companies and measure progress made against set objectives.
• Ensure the efficient and effective sharing of information gained from engagements with all relevant investment team members.
• Agree time-bound goals with companies on their requests for disclosure/systems implementation.

Measuring and monitoring bondholder engagement 

• Set targets for the outcomes of your engagements.
• Continue communication with companies to provide feedback on their progress against investor expectations.
• Report on (ESG) outcomes of specific or general engagements to internal research teams’ key stakeholders, including clients.