Fixed income investors have the power to engage

  • 20 March 2024 (5 min read)
KEY POINTS
Bond investors are in a unique position to drive sustainable change
Priority should be given to engage on themes most material to each target issuer, and client portfolio holdings
Monitoring progress and outcomes helps to guide follow-up action
Divestment is not the only option for escalation, but remains an important lever
Detailed reporting should provide transparency on engagement undertaken on clients’ behalf

The idea that the only way to influence companies is by voting at shareholder meetings has long passed – fixed income investors are in a unique position to drive change. Bruno Bamberger, Senior Solutions Strategist and Monique Carter, Fixed Income Solutions Expert, explain how investors can use their fixed income portfolio as a basis for creating positive change.

At the end of 2023, the value of the Bloomberg Barclays Global Aggregate Index was around $65 trillion. This enormous amount suggests the huge potential that investors in bonds have to influence the issuers they invest in to pursue more sustainable outcomes.

At AXA IM, we see responsible stewardship of the assets we hold on our clients’ behalf as vital to both the service we provide and as part of our overall purpose ‘to act for human progress by investing for what matters’. Our engagement policies are outlined on our website: AXA IM engagement policy.

And we know engagement works. Research by the Carbon Disclosure Project shows that companies are twice as likely to report on their sustainability performance after investors engage with them.1

Rising yields mean that more investors are allocating to debt, creating more opportunities for engagement on environmental, social and governance (ESG) issues. Fixed income offers many of the same routes to engagement as equity, but has some unique characteristics that give investors additional opportunities to encourage more sustainable policies:

  • Use-of-proceeds bonds – often known as green, social or sustainability bonds, they allow investors to channel capital directly towards solutions that are helping the transition to a more sustainable world.
  • Ability to influence quasi and sovereign investors who would not be covered by equity investors and their engagement activities. Engaging with these issuers adds yet more leverage over all the industry participants required to achieve our clients’ sustainability goals.

This makes engagement with bond issuers held in fixed income portfolios a powerful tool for investors. 

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Engagement needs a clear framework

We think there are five key considerations that facilitate effective engagement:

1. Prioritise the areas you want to influence

Engagement requires investors to be focused and not just react to the news flow or what seems important on a particular day. We prioritise our engagement activity based on the themes most relevant for our specific sustainability goals and the issuers we are invested in.

We also engage on each goal where we think it will be most effective. For example, a 10% allocation to the utilities sector can represent over 50% of a portfolio’s carbon emissions. Therefore, these companies will be on the engagement priority list when we are considering engaging on carbon emissions.

2. Decide on the appropriate form of engagement

We consider three broad levels of engagement:

  • Direct engagement with objectives – active engagement with an issuer in the portfolio based on clearly defined outcomes and often working to a timeline
  • Collaborative engagement – cooperating with other investors to help amplify the message; this includes things like our participation in the International Capital Markets Association Green Bonds Principles and the Climate Bonds Initiative
  • Sustainability dialogue – regular communication with issuers to understand how they are approaching topics covered by our engagement themes and to build good relationships; it can be as informal as a catch up at a conference but can lead to more formal engagement with objectives

We could use more than one of these with any particular issuer when trying to create change, and it can take a skill to balance these approaches to build effective engagement.

3. Track engagement against clear milestones

We track our engagement along a set path. This helps us keep track of the many engagements we are taking part in, provides clarity on when we have achieved our goals and helps us to decide our next course of action if the engagement isn’t progressing.

We usually allow 12 to 36 months for an engagement to play out. This gives us time to persuade the company of what we want to achieve and for the company to respond.

Engagement tracking at AXA IM

Image

Source: AXA IM, March 2024. For illustrative purposes only.

4. Consider escalating engagement if necessary

As we engage, particularly where we have a fixed objective for the engagement, we will increase our efforts to secure a positive outcome by escalating our efforts if we feel the engagement is not going where we want it to go. For example, we could engage higher up the corporate hierarchy or coordinate with other investors and fund managers, and also leverage our equity holdings to combine both approaches.

Ultimately, if an issuer is unwilling or unable to change direction, we have the option of divesting. We leave this as a last resort: if you divest, then you lose the opportunity to encourage positive change.

5. Report back on progress

We believe asset managers need to regularly report on their engagement activity to their clients as stewards of their investments. It should include portfolio-specific metrics on the engagement undertaken and where various engagement initiatives are.

We have been reporting on engagement for some time and recently expanded portfolio-level engagement reports. We now report on over 30 different engagement metrics and provide quarterly qualitative engagement examples to our clients, so they have clarity on action being taken on their behalf.


How engagement plays out

We asked Industrial & Commercial Bank of China (ICBC) to strengthen its coal and climate financing policies

ICBC was part of our target list of climate-laggard banks issuing green bonds. We initially engaged with the bank by letter in June 2023, but despite numerous attempts through various channels, ICBC remained unresponsive. In the end, we concluded the engagement attempt had failed. We downgraded our opinion on ICBC’s green bonds to negative and divested from this holding in our dedicated green bond funds.


Engagement could help to reduce risk and make a better world

Fixed income investors have a key role to play in making a better world. Engagement is a vital part of this. We see ourselves as a crucial medium whereby we can represent the interests of our clients to the issuers we invest in on their behalf to help create a more sustainable world.

Engagement also helps reduce risk. Many companies are exposed to risks raised by climate change, for example, be it resource scarcity, supply chain disruption or shifts in consumer behaviour. Successful engagement with issuers could help to address these risks before they become existential.

But to engage effective requires a systematic approach. At AXA IM we have built this up over a number of years and are confident that we’re able to represent the best interests of our clients to the issuers of the bonds we hold on their behalf. 

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