U.K. Pushes Bond Investors to Take Up More Corporate Activism
U.K. Pushes Bond Investors to Take Up More Corporate Activism
(Bloomberg) -- The U.K. wants corporate bond investors to use the threat of divestment to push companies toward sustainable behavior.
Debt investors should integrate stewardship into their decision-making and consider selling the bonds of issuers that don’t live up to certain sustainability standards, according to a report from a taskforce led by the U.K. Treasury. Fund managers should also consider refusing to refinance or rollover securities as tools to engage with companies, it said.
Money managers are already facing growing pressure from investors to embed environmental, social and governance factors into their funds, particularly for equities. The pandemic and racial justice protests are highlighting inequalities this year, while the consequences of climate change have been on display from California to Australia.
“Historically, stewardship and corporate governance have been focused on voting and engagement in listed equities,” said the report, which was produced with the Investment Association, an industry body for fund managers. “This narrow focus no longer meets the needs of clients who expect their managers to steward their assets responsibly across the full range of investment securities.”
Engaging with firms is a relatively recent concept for many bondholders. It typically involves private dialogue with a portfolio company on a matter seen as important to its outlook. Focusing on issues such as the carbon footprint or the way employees are managed are ways investors can improve the ESG credentials of their portfolio.
Fund giants including Vanguard Group Inc. and Fidelity Investments Inc. were given low ESG ratings in a report this month by research firm Morningstar Inc., partly due to inadequate engagement with firms. The appetite from investors for change is shown by more than $38 billion flowing into European sustainable funds that invest in fixed income in the first nine months of the year, according to its data.
Yet a hurdle for greater activism among fixed-income investors is that bonds don’t give investors formal ownership rights as stocks do, BMO Asset Management said earlier this year. It’s unclear how debt issuers will respond to creditors requesting engagement meetings to discuss the management of ESG issues, it said.
The Treasury report recommended that the Investment Association works with money managers to develop guidance on improving stewardship in fixed income. That’s a market where investment-grade corporate securities total over $12 trillion, according to a Bloomberg Barclays index.
“There is an imbalance between the level of influence of bondholders versus shareholders given the critical role debt issuance plays in the financing of companies today,” the Treasury report said. “Bondholders have no regular vote on the governance of the company.”
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