Sustainability
At TwentyFour, environmental, social and governance (ESG) analysis is integral to our primary goal of delivering capital preservation and performance to our clients.
We believe engagement should be a constructive, active dialogue between investors and companies on all aspects of their ESG performance.
While fixed income investors do not have voting rights in the way shareholders do, larger firms typically issue bonds multiple times a year, which puts bondholders in a strong position to be able to influence corporate policy by engaging with management on an ongoing basis.
At TwentyFour we aim to engage regularly with the management of every issuer whose bonds we hold in our portfolios, to better understand their ESG strengths and weaknesses, monitor their direction of travel, and overall encourage better ESG practices.
As part of our commitment to the UK Stewardship Code we publish a quarterly summary of our engagements with bond issuers, along with details of any resulting investment decisions, at the bottom of this page.
ESG investing is a fast-evolving discipline, and approaches can vary markedly from manager to manager. We therefore believe this makes the quality of the ESG data used in different scoring systems critical to outcomes, and even more so in fixed income, where we think data provision is improving but still well behind the level we see in the public equity markets. Because of this, we regularly engage with our external data providers and push them to extend their output.
We take our stewardship responsibilities seriously and look to always act in the best interests of our clients. We conduct a significant amount of due diligence on issuers with whom we invest, which enables us to avoid companies we believe do not meet our high standards in strategy, performance and/or ESG factors.
The general principals of our engagements are not fund or geography specific. Global fixed income markets are large, diverse, and complex. As such our approach is designed to retain a dynamic approach to serving our clients’ needs. In general we will engage on any topic as and when we feel it is in our clients’ interests to do so.
Investment or ESG issues can arise post-investment, and where we are concerned about specific ESG matters, management behaviour or treatment of bondholders, the portfolio managers will engage with the appropriate senior management or board member of the company involved. Within our proprietary ESG model, housed in our Observatory portfolio management system, we have a template which enables portfolio managers to log any company engagement by the following steps:
Our system is also able to capture and log any associated email correspondence, write-up, blog or any other related documents to build a detailed history of our engagement with every bond issuer.
We generally keep such discussions private as we believe better outcomes can occur this way, but we have on occasion published blogs discussing issues that we have found difficult to resolve and we felt deserved to be brought to our clients’ or the broader market’s attention.
For example:
Generally, if we have not been able to resolve an issue satisfactorily, we would not invest in bonds issued by those companies, however we would continue dialogue to ensure, as far as possible, the company in question understands why we are not investing in its bonds and that we are kept up to date with any developments including changes in management behaviours. If we are already invested in the bonds, it is possible the matter will result in us exiting the investment, at which point transparency may be delayed to avoid compromising the interests of our clients.
As a signatory to the existing FRC UK Stewardship Code we publish quarterly on our website the following engagement information:
Number of Borrower meetings / updates
Number of corporate actions
Summary of Corporate engagements
We engaged with NatWest for more information on their environmental policies as part of our Carbon Emissions Engagement Policy. We were particularly focused on their green product offering and the decarbonisation of their AUM.
NatWest have a target to provide £100 billion of climate and sustainable funding and financing between 1 July 2021 and the end of 2025. As part of this they aim to provide at least £10 billion in lending for EPC A and B rated residential properties between 1 January 2023 and the end of 2025. During H1 2023 they provided £16.0 billion of climate and sustainable funding and financing, which included £2.3 billion in lending for residential properties with EPC ratings A and B. Additionally, NatWest have expanded their operational net zero target to now include emissions reduction targets for their operational value chain targeting a 50% reduction by 2030 (not just own operations). Regarding their AUM they have a target to reduce the carbon intensity by 50% for in scope assets by 2025 from a 2019 baseline. NatWest also plan to move 70% of in scope AUM to a net zero trajectory by 2025.
Satisfactory response, maintain engagement to make sure they continue on track to meet their targets.
We engaged with Standard Chartered regarding their fossil fuel financing lending activities as part of our Carbon Emissions Engagement Policy. We asked for comments on recent trends which have improved but in our view not materially so, and also their long term plans.
They have stopped funding new coal plants globally as of 2018. Additionally, they will provide no financing to the expansion of coal power plants or retrofits etc. - they have some criteria for financing where coal is a small but declining portion of revenues and where this threshold increases each year to 2030. Current coal clients will be subject to enhanced due diligence such as they must report on GHG emissions annually to improve transparency and place greater scrutiny on their emissions. Regarding their oil and gas sector target, this aligns with the International Energy Agency’s Net Zero Emissions by 2050 Scenario (IEA NZE). This science-based scenario is consistent with the Paris Agreement commitment to limit global temperature rises to within 1.5°C and is a recognised market standard. Employing the IEA NZE guidelines results in a target reduction in absolute financed emissions of 29% by 2030. In terms of any O&G exclusions, they exclude unconventional O&G extraction - for conventional they have a number of sustainability criteria the lender must meet to be eligible such as a target for zero-routine production flaring and venting for new assets, and for existing assets they are implementing economically viable solutions to eliminate legacy flaring and venting no later than 2030. Regarding the decision to exit the Science Based Targets initiative (SBTi) they believe the latest proposal for Financial Institutions from the SBTi lacks sector guidance that adequately considers the transition of their clients and markets. As such, they have chosen not to seek SBTi validation for their targets and have instead pursued alternative third-party assurance. They recognise that SBTi has a role to play in the wider sustainability ecosystem and otherwise remain engaged with them on relevant initiatives.
Overall response was sufficient, we think there is more they can do but we must acknowledge that they are a big lender in less developed markets and the transition away from fossil fuel financing will not happen overnight. Maintain engagement and monitor updates to their policies.
Update meeting with the CFO, Helen Miles, where we pushed them on their environmental strategy and pollution challenges, and the issues faced by the water sector as a whole.
The key challenge and goal facing the company and the wider industry is the reduction of spills/pollution events. During the current regulatory period, which runs until 2025, total pollution has fallen by 22%. In the next regulatory period, which runs from 2025-2030, they plan to make further strides with aims to reduce pollution by 30%, leakages by 16% and a 30% reduction in storm overflow spills. During the meeting management stressed how seriously they take environmental improvement and their aim to remain an industry leader. Over the period they have investment plans of £13bn, a large portion of which is to upgrade the environmental resilience of the network – part of this funding is from already secured equity, debt issuance but also from the expected rise in customer bills. More broadly Severn Trent remain the best performer under the regulator Ofwat’s methodology and for the fourth year in a row they have been awarded a 4 star rating from the Environmental Agency, the only company in the sector to do so in 2022. Additionally, given the infrastructure investment needed across the sector in the next Asset Management Plan (AMP), they have bolstered their supply chain, built relationships with suppliers directly, and front loaded equipment orders. Severn Trent acknowledged the challenges the water sector faces but stressed they remain focused on their own environmental goals with no interest in M&A.
Happy to hold, Severn Trent remain a leader in the water sector. Continue to monitor environmental progress.
Engaged with Atalian, the French provider of outsourced building services, following a recent news article from Le Parisien which revealed that the ex-CEO of Atalian was being investigated on suspicion of embezzling over €36m from company accounts between 2008 and 2019.
Atalian reiterated that it will not be charged in the court's proceedings and has filed a claim for damages in respect of the misuse of its corporate assets. Internally Atalian has been working hard to reinforce its internal controls and compliance program and processes. In February 2022, it agreed to submit its compliance program to monitoring by the French Anti-Corruption Agency (AFA) over a period of two years. We view this as a positive off the back of the headlines, but have downgraded the group's governance score given evidence of weak internal controls.
Downgraded the governance score. Atalian's bonds are currently going through a restructuring, so an exit or size reduction is not thought to be feasible in the current market.
Scheduled a call with Volkswagen Leasing ahead of the new VCL 41 deal to discuss their carbon emission data disclosures. We were hoping to receive carbon emissions data on the pool, something that had been promised to us multiple times over the past 2 years.
We were told they are still unable to provide CO2 data, lagging many of their peers. Not only this, but they said they do not have a realistic timeline for when we can expect this data – they will however try to formulate a new timeline that they can stick to. They claim the reasons for them being unable to provide the data at this stage is due to complications within VW, and the fact they are unable to get the data from the automotives team. We told them we were disappointed in their answers, and that if there was any data that could be provided we would appreciate it, and we are still yet to receive anything.
Given the lack of data and timeline to provide it we have decided we will not hold this in our sustainable funds. Additionally, we wrote a blog highlighting the lack of transparency compared to their peers.
