Investment Association calls for integration between equity and bond stewardship

The Investment Association (IA) has called for stewardship to be more effectively integrated across asset classes.

In a new report setting out guidance on improving the quality and effectiveness of fixed income stewardship, the UK investment industry’s trade body said managers should encourage their equity and debt teams to coordinate on bilateral and collaborative engagements. The IA has also called on collaborative initiatives to ensure debt as well as equity is incorporated into engagement.

Coordination can take a number of forms, the report said, from research and analysis to setting joint expectations of investee companies and actual engagement. LGIM head of research and engagement Madeline King told Responsible Investor earlier this year that the firm’s stewardship team consults with its bond investors when deciding on votes at key AGMs.

The IA, which boasts more than 250 members with £9.4 trillion in assets under management, also warned that conflicts of interest could arise when collaborating across asset classes.

The report noted that, while the need to manage and reduce downside risks is shared across both equity and debt, time horizons may differ. Equity engagements may require actions which could impact short- or medium-term financial positions and thus lead to rating downgrades. The IA recommends investors have effective governance in place to manage these conflicts.

While equity engagement has traditionally dominated stewardship activities, investors are placing growing emphasis on engaging with companies via bond holdings. As well as providing avenues to engage with unlisted and state-owned firms, investors are also able to use their sovereign holdings to push for change on a country level.

The IA report also encourages bond holders to “collaborate more effectively at debt origination”, noting that there are emerging opportunities for investors to work together to influence company behaviour. Collaborating at the origination stage should focus around disclosures and covenants for ESG-labelled debt, it says.

Some collaborative engagements carried out by members of Climate Action 100+ are using bond holdings to engage – for instance, at Mexican state-owned oil company Pemex – and sovereign investors engage collectively with governments as part of the Investor Policy Dialogue on Deforestation, but collaborative opportunities for bond holders are rare.

In July, Responsible Investor reported calls by Chandra Gopinathan, a senior sustainability manager at UK railways pension fund Railpen, for a collective engagement vehicle for fixed income. “Sixty to seventy percent of the capital structure of any company is going un-stewarded” because of the current focus on public equities engagement, Gopinathan said at the time.

The IA report was developed by a 15-member group with representatives from large managers and bond houses including BlueBay, LGIM, PGIM and Vanguard. While the working group was initially set up just to produce the report, the IA has said it will add new members to create a permanent fixed income stewardship working group to investigate opportunities for collaboration, sovereign stewardship and dialogue between the Financial Conduct Authority and investors on disclosure requirements.