Engagement at TwentyFour

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.

71 28 77

Engagement in practice

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:

  • Nature of the concern
  • Desired outcome
  • Engagement
  • Response
  • Action/outcome

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.

Case Studies

 

Recent Engagements

As a signatory to the existing FRC UK Stewardship Code we publish quarterly on our website the following engagement information:

Q2 2022

 

71

Number of Borrower Meetings / updates

28

Number of Corporate Actions

35 (E), 28 (S), 14 (G)

Summary of Corporate engagements

 

Sample Examples of ESG driven investment decisions

Paragon - PAGLN

Issue

This engagement came under our Carbon Emissions Engagement Policy. Following the UK government’s proposed regulation for buy-to-let properties to have a minimum Energy Performance Certificate (EPC) rating of C, we wanted to understand Paragon’s plans to reach this target. Firstly, we questioned how much of Paragon’s £150m green bond has been allocated to new green financing. In addition, our ESG scoring data provider, Refinitiv, scores Paragon very poorly on innovation. While innovation is a more challenging area for the banking sector Paragon inhabits, we questioned its progress on green mortgages and other environmental incentive products.

Response

Paragon is currently in discussion with the UK government on how to meet the challenging EPC target. The lender is unable to force landlords to upgrade their properties, but they are actively communicating with their buy-to-let customers on this issue and encouraging action. With the launch of its green mortgage product, which offers reduced rates to new applicants with a property rated C or above, Paragon is aiming to lower the concentration poorly rated properties in its mortgage portfolio. We learned that some £142m of the £150m green bond proceeds have already been invested in eligible green loans – these are vastly in B rated EPC properties, with A rated EPCs still very rare in the UK. Paragon’s progress on innovation is not fairly captured in our current ESG score for the bank and we will look to update this, reflecting its green mortgage offering and the extension of its motor finance policy to cover lending on battery electric vehicles.

Action

We will continue to monitor Paragon’s progress on EPC ratings across its portfolio and the uptake on its green mortgage product, and we will update the issuer’s innovation score to reflect new information.

Legal & General - LGEN

Issue

We had an update call with Legal & General’s chief financial officer to discuss the firm’s latest financial performance as well as ESG. L&G has signed up to industry standard net zero targets, but we pushed for additional details on its interim targets and milestones. Given physical risk is one of the biggest threats from climate change from a valuation perspective, we questioned whether this is something the firm considers when evaluating its investments.

Response

L&G has signed up to the Science Based Targets initiative and has robust interim targets, for example to reduce its carbon intensity by 18.5% from year-end 2019 levels by 2025. Significant progress on emissions reduction has already been achieved through withdrawing investments in oil, gas and coal – next steps will be to continue this and also tackle the steel and concrete industries. Management explained the processes they have in place to consider physical risks in the investment process; they have their own seemingly robust in-house model, and the consideration of physical risks does actually result in avoiding a number of investments. One example given was a recent investment in Texas which L&G avoided due to the high probability of flooding and hurricanes. L&G also considers changes in weather patterns when assessing risks in its retirement book; extreme heat does lead to more deaths and this is included in mortality tables. Overall we were impressed with how L&G incorporates ESG considerations, specifically climate change, in its business.

Action

Continue to hold Legal & General bonds and monitor progress on emissions reduction targets.

ENRA

Issue

We engaged with Enra on its plan to measure the carbon emissions of its mortgage portfolio, as well as its strategy to improve the average EPC rating of its mortgaged properties over the next five years in line with new government requirements to have a minimum EPC rating of C for new buy-to-let tenancies by 2025 and for all existing buy-to-let tenancies by 2028.

Response

Enra records EPC ratings for its 1st lien mortgages, but is unable to record ratings for its 2nd lien mortgages. The company is not tracking carbon emissions at the moment, but has said it will look at methodologies to do so as the industry evolves. Enra intends to grow its green buy-to-let mortgage origination in order to incentivise higher EPC rated properties, and the product is also paired with a commitment to purchase carbon offset credits by West One (Enra’s lending brand), offsetting one tonne of carbon for each product sold.

Action

We expect Enra to make further progress on its carbon emissions data, so will monitor this going forward and re-engage as necessary.

Allianz - ALVGR

Issue

We engaged with Allianz following the misselling of structured alpha funds to clients through fund mismarketing and mismarking of performance.

Response

We were satisfied with Allianz’s response that this was an isolated incident, supported by a US Department of Justice ruling that called it “limited”. Allianz has paid compensation externally, while internally it has actually reduced the number of committees in its risk department to make accountability and responsibility more clear. It has also increased external auditing of the risk and compliance functions to ensure this does not happen again.

Action

In our view management has taken appropriate steps to prevent a recurrence, and we will continue to hold.

Trafigura - TRAFIG

Issue

We have had numerous engagements with Trafigura over the past six months regarding its views on the Russia-Ukraine situation and its exposure to Russian energy through a joint venture with Rosneft. We have expressed our discomfort with the Russian exposure.

Response

While it has taken time, following public scrutiny and investor discomfort Trafigura has eventually come to terms with the difficulties of handling Russian commodities after its initial focus was on complying with complex international restrictions. The firm is writing down and amortising its Vostok investment and announced its intention to fully divest its stake which will lead in to an end of sourcing Russian oil and gas.

Action

We will continue to monitor progress of the divestment.

 

Our Engagement Policy

 

Download PDF versions

Stewardship Code - 2021

Stewardship Code - 2020