Climate Action 100+ investors need to stop ignoring corporate bond holdings, says ShareAction
Survey comes ahead of pivotal voting season
A new study from ShareAction calls on signatories of the Climate Action 100+ engagement initiative to coordinate parallel work on their bond holdings
Sleeping Giants: Are Bond Investors Ready to Act on Climate Change? concludes that corporate bondholders “balk at the suggestion they might use their ability to refuse to refinance company debt to press for stronger climate action”.
It highlights that more than 300 institutional investors have now signed up to CA100+, the recently-launched initiative hailed as the largest climate engagement programme in history. Through it, they commit to “engaging and working with companies in which we invest” as part of their fiduciary duties.
However, the report points out that – despite many signatories having both public equity and fixed-income allocations within their portfolios – expectations remain focused on the former, even though “fiduciary duties are a universal responsibility”.
“If engagement with companies is an effective tool, it makes no sense to limit engagement to a single asset class,” it states. “It is our conviction that corporate bond investors, especially signatories to the CA100+, should coordinate and utilise the power they wield during debt re-financing and issuance to communicate to issuers that, unless a robust strategy to manage climate-related risks and impacts is adopted, they will cease to invest in a company’s bonds.”
The study is based on interviews from 17 investors and issuers, and five investment consultancies, ratings agencies and industry bodies, and a number of existing public-domain statements.It was conducted by Aberdeen Asset Management’s former Head of Pan-European Fixed Income, Wolfgang Kuhn, who left following the merger with Standard Life, becoming a Fellow at ShareAction.
Almost all fixed-income investors interviewed said ESG was an indicator of downside risk, and should therefore be integrated into the investment process, with “many” ESG engagement teams already working across both bonds and equities. However, “complexity and poor data” are key stumbling blocks, and some ‘go-to’ ESG approaches, such as buying green bonds or introducing sector-based exclusions were viewed suspiciously.
Respondents generally saw potential in refusing to refinance or roll over bonds on climate grounds, and with divesting specific issuers. But unlike in the equities space, fixed-income players said overall that collaboration with other bondholders, and public statements about the requirements being demanded form issuers, could be “legally problematic”.
Crucially, the report concluded that bondholders are not interested in tackling climate change beyond the realm of risk mitigation within their own portfolios. “They are not yet focused on the impact of investments,” it observed. “The question of how to limit global warming to 2 degrees (let alone 1.5 degrees) is not a question that bond investors think they need to ask or answer.”
One participant, Marie Lassegnore, a Portfolio Manager at French asset manager La Française, praised the research: “The report is right. The industry needs to induce change quickly if we want to get anywhere near 2 degrees. There is a lot of impact potential from asset managers not being utilised yet,” she said.