As Fixed income (FI) investors, we lend money to companies all around the world. We may not have a vote like shareholders, but we often control a very large portion of the money that finances them. If equity is the brain that creates and develops a business, FI should be seen as the heart that pumps blood around the body. FI investors thus have a huge opportunity to influence those they lend to, notably towards their environmental or social responsibilities.
FI investors have an important and growing role to play within the responsible investing (RI) field, especially as RImoves from a world of simple exclusion of companies on the basis of their business (e.g. exclusion of arms or Tobacco manufacturing companies), to active engagement with companies to help them develop more robust practices in the Environmental, Social and Governance (ESG) areas.
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As providers of finance, FI investors have a unique ability to influence change at a company management level for the better, especially in regards to “hot” issues such as climate change.This becomes particularly important in the fight against green washing, a practice employed by certain companies whereby they pay only lip service to ESG. Going forward, we anticipate that investors will make clear to companies’ directors, CFOs, CEOs, that they need to take the environmental and social aspects of their business strategy seriously and to respond to both performance and “ESG” objectives. And, if they do not, they will run the risk that investors will raise the cost of borrowing – not good for their business- or stop funding t altogether.
Influence and engagement
FI influence and engagement then can come in two ways: top-down and bottom-up.
Top-down is about lobbying and influencing. It is about participating in the multiple working groups that are starting to operate, to make sure that the playing field is level and that no one can avoid the climate change or other social or governance issues.
Of growing importance, however, is bottom-up engagement. In the past, fixed income asset managers tended to focus on operational and financial aspects and ask questions around the industry, the company’s strategy, market positioning, investments and financial health. Increasingly though, they are now also asking questions on climate policy, social behaviour and governance. While equity investors can engage companies through their vote, FI investors canengage through their lending requirements.
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It is going to be from within these meetings with company management teams that the need for integrated, measurable and responsible investment strategies will emerge at issuers.
For investors, the additional information gleaned from these meetings will also result in a more nuanced understanding of credit risk. Going forward, ESG information will feed into existing credit analysis work and aid in the assessment of the long term viability of the companies’ business. And, as a result of this improved credit work, increased engagement will not only promote real environmental, social and governance actions, it could also potentially lead to better performance… thus better serving investor needs.
RI is increasingly becoming unavoidable, and many investors, as well as asset managers, are acting to support the change. Integration of ESG and impact investing are going in the right direction. However, with global average temperatures continuing to rise, in our view one of the main objectives should be to align the investment sector with the goals of the Paris Climate Accord, to ensure that average global temperatures do not rise more than 2°C above pre-industrial levels.
In order to do so, the next phase for investors is to make the link between the Paris Climate objectives and investment real. In order to do this, the industry will need to move beyond the simple exclusion or best-in-class policies that currently dominate the sector, and integrate climate data and measurements into the core of the investment process. This is something FI investors are already working on, and, in the future, every investment will need to be analysed for its ESG footprint, trajectory and show compatibility with the 2°C objective. This implies a new form of engagement with companies, a new partnership that goes one step beyond pure financing, as well as the ability to report to investors on both the financial and ESG performance of their investments.
FI investors have a huge opportunity and therefore also carry a huge responsibility. No doubt that RI will continue to transform the debt market in years to come – which is a good thing for everyone ultimately.