Sustainability
At TwentyFour, environmental, social and governance (ESG) analysis is integral to our primary goal of delivering capital preservation and performance to our clients.
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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
As a leader in the European renewables sector, we asked Orsted for an update on the planned closure of its remaining coal assets.
The planned closure of coal assets next year has been pushed back to 2024/25, following orders from the government keep them open as a result of the current energy crisis. This is obviously not ideal from an environmental perspective, however this is completely out of management’s control and given the current energy crisis, we believe the government’s decision is understandable. We will continue to monitor updates on decommissioning, but we don’t think this development should punish Orsted’s environmental profile so have retained our original assessment. Orsted is a world leader in offshore wind, and aside from the coal assets it has incredibly strong environmental credentials.
Management have been honest with their challenges in coal decommissioning; continue to monitor.
Akelius’ purchase of a 12% stake in Castellum raised some governance concerns for a number of reasons; it did not align with the company’s investment plans, it came at a time when Castellum’s owner was said to be in financial trouble, and it occurred when Castellum was in a blackout period, which tends to prohibit this kind of activity. We arranged a call with management to get further clarity on these issues and to determine whether there are material governance concerns.
The overall response wasn’t seen as satisfactory, and management struggled to defend our propositions. The relationship between the CEOs remains suspicious in our view; they are good friends and the rationale for the purchase didn’t go any further than “it was cheap,” which didn’t fill us with confidence. We are also concerned that Akelius could increase its stake further, increasing the divergence with the current investment plan.
Unsatisfactory rationale around governance concerns; remain uninvested.
We engaged with management following a poor allocation after tendering our position. We were disappointed with our allocation given we have been a long term supporter of the business, we have a strong relationship with management and are a key investor for them.
Overall we were disappointed with the response from management. Their rationale was to encourage other investors into the Investec business, which we do understand and sympathise with, however we believe it is important to keep long term anchor investors happy to help provide stability in the secondary market, rather than potentially encourage volatile trading from ‘tourist’ investors.
Disappointing response; continue ongoing dialogue with management but do not increasing holding.
On December 13, we asked management about upcoming strategic plans, and more specifically, if and how they intend to integrate the company’s ESG efforts and initiatives into these decisions. We also asked the company to provide an update on its efforts and projects to reduce gas flaring.
At the moment, the company is not expecting to conduct any massive layoffs despite the more challenging economic environment. However, when assessing personnel decisions, Pemex will continue to take into account its plan developed in 2015 to promote inclusion, equality and non-discrimination. While the company does not have any ESG clauses in its employment contracts, each employee signs a contract that requires them to follow the industrial security, health and environmental standards and procedures. Pemex also confirmed it has not cut back on any employee resources such as sick days, parental leave or employee support programmes as part of any cost cutting efforts. Gas flaring in Q4 2022 stood at 5% (there was 95% use of gas), however, there was a one-time negative impact in October in which 439mmcfd were burned due to a maintenance clearance at one plant and the delay in the program relating to closure of wells with high N2 content. Maintenance programmes are currently being completed, as are infrastructure works for gas conditioning with the purpose of meeting the goal in gas use. The company’s expectation is to conclude 2022 with a slight decrease compared to the average gas flared in 2021, and we await the official report to update these figures.
Overall a satisfactory response; continue to monitor gas flaring volumes.
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