Engagement at TwentyFour

Issue

We had a call with Bank of American (BofA) IR and ESG team to understand the rationale behind the weakening of the fossil fuel (FF) financing policies, the increase in FF financing reported by the Banking on Climate Chaos report and their plans for any future policy changes or lending plans. This was a key engagement as we have noted they have weakened their policies more than their peers.

Response

Initially BofA were much harder to get in contact with, and we found engaging with the likes of JPM and Citi in the US much easier. While this is not a complete barrier, it is a red flag as to the bank’s openness to discuss this subject. Coming back to the key points we wanted address above, BofA maintains their targets set under the net zero banking alliance (NZBA) however they weakened their fossil fuel financing policies. In an update to its Environmental and Social Risk Policy Framework in February 2024, the bank removed explicit bans on directly financing new coal-fired power plants, new thermal coal mines, and oil and gas projects in the Arctic. These projects are now subject to a "heightened due diligence" and senior-level review process rather than being completely excluded. They cite the key reason for this being state laws, in Texas and Florida specifically, where these financing rules would prevent their debt capital markets team from being part of municipal deals, which is a market that they do not want to exclude. While this response is reasonable, we are doing a deeper dive to understand if other US banks are expected to follow suit in order not be excluded from this market, or whether there is more room in the laws than BofA allude to.

We have reviewed the Texas Comptroller’s “list of financial companies that boycott energy companies” and at first glance it appears that only certain funds/entities at JPM are listed but not the investment bank itself, thus we assume that they can still offer debt capital market (DCM)services in that area.

Interpreting the precise legal requirements for compliance with the Texas and Florida anti-ESG statutes isn’t easy. However, the current regulatory status suggests that peers like Citi, Morgan Stanley, and JPM are largely compliant because their policies do not constitute an outright "boycott" of the fossil fuel sector. For instance, their policies often permit new coal financing provided the projects incorporate Carbon Capture and Storage systems, a conditional allowance that has generally kept their main entities off Texas’s non-compliant list for energy boycotting in parallel with their exit from the NZBA. In contrast, BofA’s updated policy, which subjects all coal financing to "enhanced due diligence" without specific exclusions or carbon capture and sequestration (CCS) requirements, appears to be a pre-emptive overcorrection. This move may have gone further than necessary to remain eligible for business, especially given that its peers have secured re-entry without such broad policy weakening. Notably, while Citi's general entity is not currently banned for fossil fuel boycotting, it was previously excluded by the Texas Comptroller for discriminating against the firearms industry (under SB 19), and Barclays was banned for being designated a "fossil fuel boycotter" under SB 13. These actions highlight the complexity of the laws that Wall Street banks face.

Action

To complete our review of our BofA exposure, we have actively engaged with the other major Wall Street banks to understand their near-term intentions regarding their fossil fuel financing policies. Our primary objective is to confirm that they do not anticipate following BofA’s lead by rolling back project-level exclusions in response to state-level political pressure. Should these peers confirm they intend to maintain their current, comparatively stronger policies, we would then proceed with the exit of our BofA holding and reallocate our investment into those with stronger financing policies.

Issue

We reached out to JPM to understand whether they plan to make any changes to their fossil fuel financing policies.

Response

They stated that, as a matter of practice, JPM regularly reviews policies. If they make any changes they will disclose these in the usual formats, such as the 10-K/10-Q, Proxy Statement, press release or Sustainability Report. Similar to peers, there was no appetite to make future policy commitments, but they suggest they are comfortable with their stance in light of current regulation etc.

Action

Happy to hold but monitor any changes to policy, there was no clear commitment to address near term policy changes.

Issue

An ESG review of Flutter (an online betting company) was conducted following the latest ESG Committee meeting. The Committee established a focus group to assess whether US gambling companies should continue to be held in portfolios given the more lax regulatory landscape in the US versus Europe.

As part of this process, detailed ESG analysis was conducted on Flutter, the only US gambling exposure held.

Response

In the Q3 investor report, the company announced it is set to launch a new prediction markets product which will include sports in states without access to regulated sports betting. Evidently, Flutter’s direction of travel for the time being is not towards lobbying for or promoting tighter regulation, and there is little evidence to suggest this will change from our research. Being a new industry in the US, the online gambling space is highly unregulated relative to UK/European markets, and there is evidence that this has already caused negative social effects. We are concerned these negative social effects will continue to worsen as there does not appear to be an appetite for appropriate regulation. We have significant concerns from a social welfare perspective and also a credit perspective should there be rushed aggressive regulation to combat these social consequences.

Action

The Committee determined US gambling should be avoided until regulations change to protect the social welfare of users. The position will be sold opportunistically, subject to market conditions. The sector will remain under review as regulatory standards and industry practices evolve.

Issue

We engaged with the NewDay team to address concerns from the team on the social qualities of lending.

Response

NewDay agreed to an on-site due diligence visit, to provide examples of their lending policy and perspective of consumer duty in their lending process.

We developed an understanding of the strength of the ESG framework at NewDay, which supports customers through the credit cycle. We ran through an underwriting case with the team, to assess how they price risk and are comfortable with the assessment. NewDay also displayed the extensive relationship they have with the regulators, and there have been a number of policy implementations in recent times to support borrowers.

Action

This was a strong engagement. We were able to formalise NewDay as an approved issuer following the due diligence, which will open opportunities for the funds. We will continue to engage with the team as the policy and regulatory landscape evolves.

Issue

We engaged with the Enpal team regarding the environmental considerations on solar panel and heat pump lending.

We have also asked about Enpal's development of an ESG policy, which was not present in the previous issuance, as well as any biodiversity related policy as part of our routine engagement.

Response

There was a number of factors that were discussed:

Firstly, on sourcing and manufacturing, Enpal continues to rely on Chinese manufacturers especially in the Solar photovoltaic (PV) segment. This will not change anytime soon, but Chinese manufacturers are setting up capacity outside of China, such as Malaysia and Vietnam. In terms of heat pump sourcing, most of the products are manufactured by Bosch, which is a German company, so there is reduced footprint from shipping.

Secondly, on portfolio emissions, the transaction is backed by 9,443 loans for residential solar systems, which include 7,008 PV Systems and 2,435 heat pumps. These systems help reduce CO2 emissions by about 48,694 tons annually through 70.57 GWh of clean energy generation.

Thirdly, on ESG policy, Enpal is working on a broader company-level ESG strategy, which will be published by the end of 2025, and we intend to follow up on. We have been told that there is no biodiversity related policy in consideration at the moment.

Action

Enpal continues to provide detailed responses on ESG related matters and have come back to the market with a green bond issuance, which is encouraging.

We will continue to engage with the team and will follow up on the ESG policy at the end of 2026.