Harrison Hill looks at how the engagement activities of public market investors can help drive better ESG practices and outcomes.
Our impact-aligned bond strategy aims to contribute towards solving major sustainability challenges in two ways, firstly via our investments in issuers who themselves are delivering solutions to some of the world’s biggest environmental or social challenges, and secondly through our stewardship actions as investors, with our investees as well as other key stakeholders such as policymakers and regulators. While, as lenders, we are not direct equity owners of the companies in which we invest, the finite nature of fixed income assets (as they have fixed maturities) provides an interesting and often underappreciated dynamic. Unlike equity assets, which issue shares without an expiry date, companies that issue debt tend to require repeat access to the market in order to maintain balance sheet ratios and refinance maturing bonds. This need for ongoing access to new capital, and ideally at as low cost as possible, means fixed income investors may not necessarily be as disadvantaged as equity investors as some may think.
Engagement is part of our investment monitoring process for our strategy. Largely focused on gaining better insights, our efforts range from better understanding the impact companies make through their impact reporting, to gaining insights into how they position their businesses to seize market opportunities. In some instances, we may engage to encourage change, such as ensuring companies are taking a responsible approach to supply chain or waste practices, or informing on how they structure future debt instruments. Unsuccessful engagements where we have not seen the changes we have recommended can lead to withdrawal of our support for future new debt issuances, which can potentially have an adverse effect on the cost of debt for the issuers. The combination of all these levers helps issuers understand our expectations and allows us to make informed investment decisions while enhancing our ability to report effectively to our investors.
As an example of engagement for greater insight, we have had ongoing interactions with a leading European manufacturer and service provider for onshore and offshore wind turbine generators on its sustainable business strategy. This includes ongoing discussions with senior management to further explore the company’s strategy, consider challenges to the renewables space and evaluate its robustness compared to peers’ business models. The company has re-affirmed with us its ambitions in offshore wind and by sharing news of its strong project pipeline, we were reassured about the fundamentals of the business and maintained exposure, despite the headwinds faced by the renewables industry.
The emergence of the ESG-labelled bond market is another lever of opportunity through which fixed income investors can signal their priorities and preferences to issuers, as we can differentiate between which debt instruments we are willing to support, and what specific ESG issues we view to be priority ones for the issuer to address. To avoid an unsuccessful issuance, issuers can and do engage with us on our views before finalising their ESG debt instrument.
Beyond engaging with issues, our engagement efforts for the impact-aligned strategy are also directed towards other key stakeholders (such as policymakers, regulators, civil society, as well as our clients) as we recognise addressing sustainability challenges requires systemic change, which requires engagement on the wider financial and economic system. We may conduct such activities bilaterally but also collaboratively as part of a membership body or specific engagement initiative, and this can increase our scope to influence issuers and key stakeholders. Our engagement includes continued co-chairing of the Investor Policy Dialogue on Deforestation (IPDD) (a global collaborative investor initiative formed in July 2020, to engage with governments on halting deforestation), as well as engaging with key players in the investment value chain on developing conservation bonds.