UK campaign group Share Action has warned professional bond investors they could lose leverage if they have a firm-wide engagement strategy dominated by their equity team.
The group has published a report entitled Sleeping Giants: Are Bond Investors Ready to Act on Climate Change? examining their approach to ESG issues interviewing 22 bond market experts.
The report suggests that “because of their different position in the capital structure, bond and equity holders can have different interests”.
It adds: “By centralising engagement functions, the interests of bond investors and ultimate beneficiaries may be subordinated to the interest of other asset classes or a ‘firm wide’ strategy. Any potential leverage bond investors might have could be lost.”
The group also wants investors to club together suggesting that debt investors’ engagement will only be effective in collaboration although it accepts that bond investors were concerned about concert party issues surrounding collaboration and joint engagement.
Share Action warns that stifling engagement among institutional investors on systematic challenges such as climate change is not in the interests of financial stability. It wants EU regulators such as insurance and pensions regulator EIOPA and asset management regulator ESME and, in the UK, the Financial Conduct Regulator, to provide clear guidance on how bond investors can engage collectively.
“Leaders need to build a corporate bond investor consortium that is comfortable working to apply a forceful engagement process to high carbon emitting industries and issuers,” the report says.
Relevant data required
“Many of the interviewees say that that they do not have the data needed to make ESG and climate change integral parts of their investment decision making process.”
It also says that virtually all respondents expressed concern over the exclusion of whole industries or sectors from portfolios.
Despite being sceptical around sector exclusions, the group notes that bond investors acknowledge that the threat of divestment to a specific issuer’s bonds or indeed of refusals to refinance/roll over corporate debt.