Fixed income (FI) investors can have huge influence on markets, and, therefore, we have a huge responsibility. We may not have a vote, but we often control the largest portion of the money that finances companies. If equity is the brain that creates and develops a business, FI should be seen as the heart that pumps blood around the body.
As such, the FI sector has an important and growing role to play within the responsible investing (RI) sector, especially as it moves from a world of the exclusion of companies on the basis of Environmental, Social and Governance (ESG) grounds to active engagement with companies to help them develop more robust practices. As providers of finance, FI investors have a unique ability to affect change at a company management level for the better, especially in regards to 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 responsible aspect 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 or stop funding their business altogether.
Influence and engagement
Influence and engagement then 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 issue.
Of growing importance, however, is bottom-up engagement. In the past, asset managers tended to only 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.
It is going to be from within these private meetings that integrated, measurable and responsible investment strategies will emerge.
It is also from these engagements that a more nuanced understanding of credit risk will emerge, as asset managers will obtain additional useful information that can feed into their existing credit analysis work and aid in their assessment of the long term viability of the business. And, as a result of this improved credit work, increased engagement not only promotes real environmental, social and governance actions, it could also potentially lead to better performance.
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 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 RI 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 carry a huge responsibility, and RI will continue to transform the market in years to come – which is a good thing.