ESG “engagement” has long been a feature of successful equity investing.
Now it’s becoming an important tool for fixed interest investors seeking to manage risk and drive change, says Pendal’s Murray Ackman.
“Engagement” refers to dialogue between investors and investees that seeks to improve policies or public disclosure on social, environmental and governance matters.
Engagement is not just intended to create a warm, fuzzy feeling — it’s designed to make change. And there’s plenty of evidence such change is linked to better financial performance.
Engagement is not just for equity investors though.
Since large parts of the market are unlisted, fixed income investors are discovering they have a critical role influencing investment decisions and driving change at some of the world’s most important companies.
“Look at the biggest players in the climate transition — most of the utilities, many of the infrastructure owners — they are not listed entities,” says Ackman, a credit ESG analyst at Pendal.
“But they issue debt — so we have access to influence them.”
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Ackman says Pendal’s Income and Fixed Interest team has undertaken 73 engagements so far this year, topping the figure from the previous year in less than eight months.
Fixed income engagement is a different operation to the direct engagement and annual meeting voting rights enjoyed by shareholders, he says.
“We’re not owners. We don’t have that direct line.”
But fixed income investors have some important advantages, he says.
“For starters, we have longer time frames — if we’re looking at 10-year bonds, we want to determine what the risk is of stranded assets in that time.
“In fixed income we don’t have the potential for a big gain in one name to potentially offset a series of losses. When you have a portfolio where you need the cumulative effect of basis points here and there to outperform the benchmark, any downgrade can be significant on performance.”
Many of Pendal’s engagements this year have focused on the ambition of an issuer’s carbon emissions targets.
“For companies whose scope one and scope two emissions are mainly related to electricity use, they are going to have a natural reduction in emissions by nature of how the grid is transforming to have more and more renewables.
“For us to be excited, we want you to have a trajectory that is quicker than what the grid is doing anyway.”
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Another factor is pushing for improved reporting.
“The technical word is ‘additionality’ — if your project did not happen, what would be the difference?”
As well as directly with issuers, fixed income engagement also operates through the banks and other lenders who are the crucial links in both initial lending and the trading of debt on secondary markets.
“By regularly talking to the banks and arrangers about what our expectations are, they can say at the very early stages if a deal is not going to fly.
“We are very explicit about what we want and don’t want to see in deals, and we make that known on investor calls.”
Ackman says ESG expectations are evolving rapidly and new regulations are being introduced, “so what was best practice a couple of years ago might not be in future”.
Pendal’s fixed income engagement is primarily concerned with three issues: the risk of stranded assets, the pricing risk of credit downgrades and the credibility of sustainability-linked issues.
“These discussions have been from the coal face all the way up to the executive level.
“We’ve found issuers are increasingly literate on ESG matters and we’ve seen our frank advice being acted upon,” says Ackman.
Credit ESG analyst Murray Ackman joined Pendal’s Income and Fixed Interest team in 2020 to provide fundamental credit analysis and integrate Environmental, Social and Governance factors across credit funds.
Murray has worked as a consultant measuring ESG for family offices and private equity firms and was a Research Fellow at the Institute for Economics and Peace where he led research on the United Nations Sustainable Development Goals.
Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.
The team’s awards include Lonsec’s Active Fixed Income Fund of the Year (2022) and Zenith’s Australian Fixed Interest Manager of the Year (2020).
Regnan Credit Impact Trust is a defensive investment strategy that puts capital to work for positive change.
Pendal Sustainable Australian Fixed Interest Fund is a defensive Australian bond fund that delivers market-leading performance with positive environmental and social outcomes.
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