Staking a claim
Parallel to the rise of environmental, social and governance concerns in financial markets has been the principle of stakeholder engagement beyond the typical realm of investors pushing companies for financial returns.
At the KangaNews Sustainable Debt Summit 2021, participants discussed the manifestation of broader stakeholder engagement and its effect on companies – with particular reference to fixed income. Plenty of examples have emerged in recent months to illustrate the increasing layers of accountability companies now face in the sphere of climate-change risk alleviation and mitigation.
Multiple conference speakers cited the appointment of climate-conscious members to the board of ExxonMobil by activist investors in May as a watershed moment. Meanwhile, courts in many jurisdictions have made rulings reinforcing the responsibility of companies and pension funds for the environment.
Rebecca Mikula-Wright, Sydney-based chief executive at Investor Group on Climate Change and Asia Investor Group on Climate Change, said it is important for investors to be engaged with companies and regulators. “Investors can play a role in engaging with companies at operational, strategic and financial levels, but also with regulators on what rules would work or are needed in a given national context.”
Institutional-investor engagement has long been touted for its potential to shift the dial on corporate ambition regarding environmental issues. The role of investors in engaging on the fixed-income side has typically been less obvious than in equities, though.
However, Chris Newton, executive director, responsible investments at IFM Investors in Melbourne, explained that debt investors can engage with issuers in many facets related to managing environmental, social and governance (ESG) risk. For example, any investor exposed to utility companies needs to be aware of and engaged with individual companies’ management of bushfire and flooding risk, and the capex or opex requirements related to managing those risks.
Newton added that engagement is about being able to demonstrate that investors understand the risks of the businesses they are exposed to and are acting on them in order to ensure the long-term viability of their investments.
Liza McDonald, head of responsible investment at Aware Super in Melbourne, agreed that ESG issues have long factored into investor engagement with debt issuers when considering timeframes and risk profiles. However, she added that the development of sustainability-linked instruments enhances investors’ ability to engage and help set targets for debt issuers.
One issue that institutional investors – particularly the largest superannuation funds – face is that they typically own assets across the entire economy. This means divestment from any one sector can be challenging. However, Iris Davila, head of investment stewardship team, Australia at BlackRock in Sydney, explained that this is precisely why engagement across the capital spectrum is even more important.
“We are predominantly index holders and if a company is in one of the indices we have no choice of divestment. We rely on engagement, but it is not about telling companies what to do. We are trying to encourage long-term sustainable business practises with a fiduciary and financial-risk perspective in mind,” Davila said.
By contrast, some institutional investors indicate that divestment is increasingly an option they are willing to take. McDonald said it is a tool Aware Super can use – though engagement is the first port of call. “If we are invested in a company or a sector that is not going to deliver long-term sustainable returns or is not transitioning to a lower-carbon future, and we think it is a stranded-asset risk, we will divest. As asset owners, we need to use the tools we have to influence real-world outcomes,” McDonald explained.