Published today by IIGCC, this guidance focuses on publicly listed corporate debt. It offers a detailed breakdown of the challenges and opportunities presented by different bond types, as well as a six step toolkit and examples of corporate bondholder stewardship in action.
Its approach is designed to help bondholders build long-term relationships with bond issuers, setting objectives on time horizons beyond their initial holdings and protecting the value of current and future investments from the transition risks of climate change.
It also demonstrates the potential of engaging across the capital markets ecosystem, such as with banks or credit rating agencies, to further investor stewardship activities. This offers significant opportunities for bondholders, who are unable to exercise voting rights in the way that an equity holder can.
Read: Net Zero Bondholder Stewardship Guidance.
A critical role
The immense size of the global fixed income market, which includes corporate bonds, makes bondholder stewardship a critical element of an investor’s climate and net zero stewardship activities.
In 2021 alone global long term fixed issuance was USD $26.8 trillion (including sovereign funds), far exceeding the USD $1 trillion issuance in global equity.
Bondholders play a crucial role in the corporate bond ecosystem. Their investment can influence a company’s capital structure and its activity in the real economy, as well as provide much of the capital needed to transition in line with the Paris Agreement.
Recognising this opportunity and the need to engage corporate fixed income holdings in new ways, IIGCC established a Bondholder Stewardship Working Group in December 2022. Made up of asset owners and asset managers, its activity builds on the successful launch of the Net Zero Stewardship Toolkit.
Importantly, the toolkit and this new guidance is aligned with IIGCC’s Net Zero Investment Framework (NZIF), the most commonly used framework by investors who have set net zero commitments.
Under NZIF investors are recommended to set an engagement target of 70% or more for assets considered “aligned” or “under active management”, covering material sectors in listed equities and corporate fixed income.
Six steps
This guidance focuses on publicly listed corporate debt with engagement as the core priority. It identifies and seeks to address the key challenges and opportunities investors can encounter across different bond types. It begins by outlining six steps for bondholders:
- Undertake portfolio analysis, set portfolio alignment goals and develop a stewardship decarbonisation framework
- Set net zero alignment criteria, alignment levels and time-bound engagement objectives
- Develop an engagement strategy for priority companies
- Baseline engagement and voting approach
- Asset owner and manager alignment
- Transparency
Underpinning each stage is the importance of alignment between the issuance, the issuer’s climate transition strategy and net zero alignment over time.
Some investors may recognise these steps from the Net Zero Stewardship Toolkit, which focused mainly on listed equities. Here, each step has been adapted to reflect the specific challenges of corporate bondholders, supported by case studies showcasing the steps in action.
Active stewardship
From prioritisation and avoiding downside risk to engaging with labelled bonds and high-yield issuers, the guidance highlights the experiences of Railpen, Neuberger Berman, Jupiter Asset Management and more.
One case study takes a closer look at ‘macro’ stewardship, where engaging with the broader capital markets ecosystem can be an efficient tactic, particularly where dialogue has proved ineffective.
In 2022, Federated Hermes had tried and failed on several occasions to engage with an emerging market telecommunications company, to the point where escalation was required.
Fortunately, the firm had participated in a new bond issuance the previous year. This meant its analysts had contacts at the investment bank which had been the global coordinator for that new issue.
Federated Hermes asked the bank to make a formal introduction to the unresponsive issuer and explain the context behind the request. This led to a quick response from the company and a meeting was arranged for later that year.
The engagement proved productive, with the company CEO and CFO joining to present their vision for the company and the beginnings of an ESG strategy. Through this, Federated Hermes learned that the company was planning to publish a sustainability report and set targets for key areas.
This included plans to use solar panels and lithium-ion batteries to reduce its carbon emissions and also make its operations more resilient compared to the intermittent power supplied by the grid.
Better informed, Federated Hermes will now continue to engage the company after the bank helped to establish a conversation.
Explore more case studies in the Net Zero Bondholder Stewardship Guidance.
Reflecting on the importance of this launch Stephanie Pfeifer, IIGCC CEO said: “The guidance marks a major step towards progressing and framing bondholder stewardship – a critical yet largely untapped element of climate and net zero stewardship.
“Ultimately, by enhancing bondholder stewardship, investors are better able to steward their debt capital investments, protect long-term value for clients and help finance the path to net zero. In this regard, the guidance should further support investors to deliver on their own climate commitments.”
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