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.

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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:

Q3 2022

 

24

Number of Borrower meetings / updates

39

Number of corporate actions

21 (E), 24 (S), 2 (G)

Summary of Corporate engagements

 

Sample Examples of ESG driven investment decisions

Yorkshire Building Society - YBS

Issue

This engagement was conducted in relation to YBS’s new Brass 10 RMBS transaction and came under our Carbon Emissions Engagement Policy, since YBS is lagging peers with respect to its ESG disclosures. Following the government’s proposal for all UK homes to have a minimum EPC rating of C from 2035 (2025 for private landlords), we wanted to understand: the issuer’s plans to reach this target, what green products it offers to incentivise homeowner upgrades, when it plans to disclose Scope 3 financed emissions, and any plans to reinforce its net zero commitments through signing up to the Science Based Targets initiative (STBi) or the Net Zero Banking Alliance.

Response

We discussed the reporting of Scope 3 emissions; we learned that YBS doesn’t currently have a plan in place to report these but will consider it in the future, and we reiterated it was very important to us to obtain this data. YBS doesn’t have any green products but it is are looking at offering some in the near term, and we highlighted it is lagging peers in this regard. There are now plans to improve the average EPC rating to C on owner occupied mortgages (we asked the issuer to focus on this given it intends to be in line with net zero for Scope 1 & 2 emissions by 2025 and the minimum EPC of C is to be in line with net zero). On the social side, we challenged YBS on its social-labelled securitisation and if it was doing anything differently; the lender has not changed its lending criteria and believe in its social label on the grounds that it targets underserved borrowers (i.e. self-employed borrowers who wouldn’t be accepted by high street banks) and provides affordable housing. YBS doesn’t have specific targets to increase social lending as a proportion of its total origination, since this is already part of what it does and all the proceeds of Brass 10 have already been allocated for social lending. YBS has significantly grown its ESG team so we do expect process on the concerns we highlighted in the near future.

Action

There is plenty of scope for improvement, especially regarding net zero and green products. We will continue to monitor progress and follow up in six months.

Southern Company - SO

Issue

Southern Company (American utility company) has the highest carbon intensity in our portfolios and higher than its European peers, so environmental improvement is very important. We had a call with the firm’s investor relations team to understand its emissions reduction and net zero plans, and its timelines for exiting coal and full Scope 3 emissions disclosure.

Response

This was a very constructive and honest call with management. Regulation differs between the US and Europe, so while the plan is to exit coal as soon as possible, local commissions have the final say and they have pushed back and actually extended the decommissioning timeline due to the ongoing energy crisis – this is outside the issuer’s control. Overall on coal the desire and the plan is to exit but external factors are hindering this. Southern Company plans to make a more formal net zero commitment in the near future and disclose Scope 3 emissions in 2023. We pushed management to sign up for the SBTi's, however since many environmental decisions are out of their control (such as the closure of their coal plants) they are currently unable to sign up to the SBTi’s. Management also highlighted that due to the greater consumption of coal due to the energy crisis, carbon intensity is unlikely to change much over the next 18 months.

Action

A satisfactory response. Many factors are unfortunately out of management’s control but there is a lot of work ahead to catch up with European peers. We will continue to monitor progress.

Heimstaden - HEIBOS

Issue

We engaged with Heimstaden previously as part of our Carbon Emission Engagement policy, and we followed up on its ESG progress during a recent update call.

Response

This was an interesting engagement as management highlighted that we can expect a deterioration in emissions figures this year. This is due to the increase in coal use across Europe as a result of the war in Ukraine, which has led to a shutdown of Russian gas supplies. This is totally outside their control, and therefore does not warrant a reduction in the firm’s environmental score. Overall Heimstaden continues to progress with other ESG initiatives, including the upgrade of existing properties.

Action

Management have been forthcoming in their struggles with achieving environmental progress. We will continue to monitor.

House of Finance - HOUSEH

Issue

We asked the company about the social implications of employee pay, any union involvement and potential strike impact and whether they had seen aggressive wage demands.

Response

There are a number of unions which employees are involved in, however this is only 3% of employees and therefore not material. In terms of wages, the company does not have a large number of employees on minimum wage, generally wages are higher and aggressive wage pressure is not expected – the engineering/consulting segment consists of highly educated white-collar workers and specialised talent solutions focuses on employees with niche skillsets. The company does not expect staff strikes or aggressive wage demands that will outpace sales growth and thus margins will be maintained.

Action

A satisfactory response, continue to hold.

Ludgate Funding - LGATE

Issue

LGATE is a securitisation of UK mortgages originated before the global financial crisis, which contains some structural features and different cashflow triggers to protect bondholders. One of these triggers is on the reserve fund, which is typically used to cover defaults or any shortfall in interest on the notes. However, we realised the reserve fund had been drawn by £700k in April 2022 and this amount was paid to the residual holders, which is not the purpose of a reserve fund. As a result, the reserve fund trigger was breached and the amortisation of the notes switched from pro rata to sequential amortisation, accelerating the redemption of the most senior notes.

Response

We have reached out to the Trustee to understand why the reserve fund was drawn to pay the residual holders, triggering a negative impact on the redemption of the mezzanine notes. We monitored this in the next quarter in July 2022 and it wasn't resolved, therefore we had to take action on the ESG score.

Action

The deal was scored when the reserve fund was at its target, and the reserve fund is an important structural feature for this deal. Therefore we decided to decrease the Governance score by 5 points as the reserve fund trigger has been breached and the response from US Bank was not satisfactory. This led to an overall combined score lower by 2 points at 42. This score is already low due to the lack of sponsor on this deal. We will monitor this closely to see if the issue is resolved in the next quarterly report.

Solwat - SOLWAT

Issue

We were looking for more information on the company’s water waste and its targets for recycling water. The bonds we own are linked to a set Sustainability Performance Target (SPT) to achieve 60%+ recycled water as a proportion of total water volume sold in 2022.

Response

The company is placing great emphasis on increasing its water recycling levels, which are currently around 70% and on track to exceed the SPT. Volume of water recycled increased 179% over the past year. Solwat is working with customers, regulators, and academic institutions to pilot technologies for the beneficial reuse of treated water outside of oil and gas applications to minimise disposal.

Action

We continue to monitor the name and stay invested at this time.

 

 

 

Useful links

Our Engagement Policy

ESG at TwentyFour - Integration and Engagement

Stewardship Code - 2021

Stewardship Code - 2020