While environmental, social and governance factors are incorporated into bondholders investment process, investors in fixed income are reluctant to engage with companies failing to meet environmental standards, according to the Shareaction report, Sleeping Giants – Are bond investors ready to act on climate change?.
The research, led by Wolfgang Kuhn, former head of pan-European fixed income at Aberdeen Asset Management, is based on in-depth interviews conducted between May and October 2018 with 22 investors, ranging from asset managers, asset owners and corporate bond market professionals. The bulk of respondents (15) were based in the UK.
Shareaction accused bondholders of lagging shareholders on engagement, although it did recognise fixed income could be overlooked in favour of equity holdings in asset managers where engagement is one centralised function. One respondent in the report described the bond manager approach to ESG as “tea and biscuits”. Engagement often was too friendly and in danger of becoming a marketing activity, respondents said.
While Shareaction acknowledged bondholders were interested in mitigating climate risk at the portfolio level, it argued bondholders could make a significant contribution to reducing the risks of a 2-degrees Celsius rise in temperature, which the Paris Agreement aims to avoid, by working collaboratively to target high-carbon companies.
Even within portfolios, many bondholders said the effects of climate change could take a long time to play out while issuers with high ESG risks could perform well for a considerable period of time. ESG-related risks are often explicitly accepted by investors if compensation in the form of yield pick-up is high enough, the report said.
Kuhn said even though bond investors had come a long way on sustainability they still were failing to use their financial power to effect positive change when it comes to environmental risks. “You can build your house on a hill to protect it from rising sea levels, but it won’t stop the sea from rising,” he said.