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 BNP for more information on their environmental policies surrounding fossil fuel financing as part of our Carbon Emissions Engagement Policy. We were particularly focused on the rise in financing in 2022 and their lending criteria for new fossil fuel financing.
Regarding the increase in emissions, BNP disputed the data from the Banking on Climate Chaos report and believed that total financing did actually decline in 2022 (credit exposure to oil and gas exploration and production fell 12% between 31 December 2020 and 31 December 2022, and 15% in oil exploration and production) – we have therefore followed up to determine the methodological differences. They further highlighted that between Q3 2022 and Q3 2023, upstream oil exposure decreased by 45% and upstream gas exposure decreased 37%. Coal exposure also fell from 1.3bn EUR to 0.4bn during the same period and they reinforced their 2020 decision to exit from the thermal coal value chain by 2030 in the EU & OECD and by 2040 for the rest of the world. In addition, since 2023, BNP no longer grants financing for the development of new oil or gas projects, regardless of the financing terms. BNP is committed to decrease by 80% its upstream oil exposure and by 30% its upstream gas exposure between Q3 2022 and 2030. To offset the removal from fossil fuel financing BNP plan to continue expanding their financing of low carbon energy: they said in 2028, at least 80% of BNP Paribas’ credit exposure to energy production will be composed of low-carbon energies (representing EUR 40 bn), and at least 90% in 2030. At the end of September 2023, credit exposure to low-carbon energy already represented EUR 32 billion, i.e. 65% of financing for energy production. For the energy companies BNP currently provide finance to, they will examine their oil and gas policies and alignment to net zero by 2050 – if this is not sufficient BNP will look to engage to find an acceptable solution but if this cannot be achieved they have said they will halt financing. BNP are also working with the Science Based Targets initiative (SBTi) to create a framework that works for financial institutions and is currently reviewing the pilot testing version of SBTi’s Corporate Near-Term Criteria published in November. BNP highlighted that despite four international banks having decided to exit the initiative in 2023, they will continue to engage in dialogue with SBTi to ensure that the future framework is designed to take into account the specificities of international financial institutions such as BNP Paribas as well as to ensure its compatibility with other existing climate-alignment frameworks already in use such as NZBA. BNP have a leading position in ESG labelled issuance; they were #1 in the world in 2023 in Sustainable Finance (bond and loans) with $62.5bn, and #1 in the world in Green Bond issuance with $25,6bn.
Satisfactory response. We think BNP have made significant strides in their approach to fossil fuel financing and their support of low carbon alternatives and we will therefore continue to monitor the evolution of their policies and financing data in this and related areas.
We have been a long investor in SSE, supporting its transition from coal to a low carbon energy generation company. We met with the Group Treasurer George Duncan to discuss the company’s latest results and environmental plan regarding renewables.
SSE highlighted that the company will not invest in any new gas plants that are unabated or do not have CCS (carbon capture and storage) plans. They continue to grow their renewables portfolio with Dogger Bank which is expected to be completed next year – this will be the world’s largest offshore wind farm. Berwick Bank is the same scale as Dogger and is expected to be the next site SSE will target to expand their offshore wind portfolio – they said we can expect news on this next year. Solar is not a key generation avenue for the company and current exposure is small but they said we should also expect further investment there as well. Away from energy generation, they continue to expand their electricity grid networks, specifically with a focus on High Voltage Direct Current (HVDC) cables from the North Sea to northern England.
Strong engagement, continue to hold. We believe SSE continue to prove they are a leader in the energy transition with the continual investment in renewables and electrification.
Emailed the investor relations team to ask which policies the company has in place to ensure a greater proportion of females are hired into managerial positions, given only a 16% female representation within the board of directors.
Management responded highlighting that they have broader targets around the % of senior leadership being female. They have set themselves a target to achieve 40% gender diversity by FY26 and have already exceeded this target in FY24 with 44% of this senior leadership group being female.
Satisfactory response. Management are clearly aware of the issue and we think are taking adequate steps to address it, with demonstratable progress having already been made.
Following the launch of their residential mortgage-backed security (RMBS) transaction we noticed some lack of EPC data and although the company had committed to net zero targets for scope 3 they left out ‘Financed emissions’. We had a meeting with their ESG team to address these issues and seek clarity on their ESG strategy.
Since the previous transaction they have improved the EPC coverage significantly (from 46% to 79%), and they are still mapping the remaining part of the portfolio. In addition, Principality is also on course to meet their target to finance new homes with EPC of B or above. Regarding net zero, they explained that although they would like to set a target for the decarbonisation of their mortgage book they don't believe it’s possible to set a meaningful target until there is more certainty over the Government's policy and investment plans in relation to achieving its net zero commitment under the Paris Agreement.
We do think this is a sensible approach and we value the effort and ambitious targets they have set internally on EPC ratings. Happy with their level of engagement and will continue to monitor progress.
Following performance deterioration in their previous SCGC deals – securitisations backed by German consumer loans - we were looking to gain some clarity on how they have tightened their underwriting standards, and how they are looking to support borrowers through cost of living pressures.
Following cost of living pressures and inflation throughout 2022 and 2023, performance deteriorated significantly across all of the SCGC shelves, and in line with GFC levels. Santander realised their models were not fast enough at reacting to the changes in consumer behaviour and began developing a new scorecard for their borrowers with significant changes in circumstances; to better assess the affordability of their borrowers they changed the weightings of the risk factors, making indebtedness a larger driver. They also made changes to affordability, to make sure the borrowers can meet payments, by changing the inflation calculation from an average of real 12m inflation to a forward looking calculation (14% increase on affordability stress). These changes impacted the % of approvals, meaning those who were considered as "green cases" dropped from 70% in 2019 to 40% in 2023. They expect performance to normalise following this.
Happy with responses. Santander showed clear signs they have reacted to what has happened and so we remain comfortable investing in their SCGC range however we will continue to monitor the performance closely.
