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:

Q4 2023

 

48

Number of Borrower meetings / updates

64

Number of corporate actions

12 (E), 14 (S), 7 (G)

Summary of Corporate engagements

 

Sample Examples of ESG driven investment decisions

Edgewell Personal Care (EPC)

Issue

Engaged with EPC for disclosure on the percentage of total firm-wide revenue related to animal testing. We note that Edgewell has a clear policy disclosure stating it only does animal testing where required to do so by law (for example in countries like China). However, we still wanted to know what percentage this was and what the company was doing to reduce that figure via collaborations, initiatives, and regulatory campaigns.

Response

We attempted several times to get a detailed response from management, however, we were disappointed with their lack of engagement. We do not have any credit concerns for the company, nor do we believe that animal testing is a big part of the business, however, we expect timely and thorough responses from our investee companies.

Action

Due to a lack of cooperation from the company we decided to exit the position across our funds within an appropriate time frame. We also decided to adjust the company’s governance score to reflect our new stance, noting that if we were to revisit the name in the future, we would need to see substantial improvements in its investor relations response.

Lendinvest (MORTI)

Issue

We engaged with Lendinvest during the marketing of their new issue in order to discuss initial aggressive structuring and limited skin-in-the game.

Response

We felt that there would have been low governance on the deal, with low call incentives. We discussed adding more debt-friendly features within the deal, in order for us to participate. Lendinvest took on our feedback and incorporated a ‘turbo’ feature within the deal, which means the issuer does not get excess cash if the deal is not called. This materially improves the call incentives and improves bondholder protection, benefiting the governance of the deal. It was a positive sign from the issuer that it listened to investor feedback and strengthened the structure of the deal as a result.

Action

We were happy with the inclusion of a turbo feature from Lendinvest and we bought the new issue as a consequence.

Belmont Green (TWRBG)

Issue

We engaged with Belmont Green to discuss its ESG strategy, particularly plans to impose KPIs related to mortgage-book emissions.

Response

Belmont Green is showing impressive progress at a company level, where the firm has imposed KPIs aligned to UN sustainable development goals 10, 11 and 13, and has net zero targets for scope 1 and 2 emissions (2050). We pushed management on bringing this focus to their mortgage book and including scope 3 emissions within their financed portfolio. The firm is advancing in disclosures on its mortgage book, and during 2023 completed a materiality assessment. This included EPC disclosure of its back-book and setting 2021 as a baseline for CO₂-financed emissions. The firm’s immediate focus will be on customer education regarding EPC improvements, but this is subject to regulatory changes regarding EPC requirements in the buy-to-let sector. The firm hopes to set quantifiable targets for its mortgage book during 2024.

Action

Re-engage with Belmont Green in six months in order to monitor progress on setting KPIs linked to its mortgage book.

Heimstaden (HEIBOS)

Issue

Engaged with Heimstaden for an update on its emissions reduction progress as part of our carbon emissions engagement project.

Response

Overall scope 1, 2 and 3 emissions increased 2% but this was primarily due to an increase in tenants’ scope 3, where electricity was from more carbon intensive sources. Scope 1 and 2 declined 2% due to measures taken by Heimstaden, such as energy efficiency initiatives and a transition to renewable electricity contracts.

In 2022 the firm expanded and developed its climate roadmap to include a large number of properties acquired in December 2021 and during 2022 – further approved by the science based targets initiative (SBTi). These commitments aim for a 42% reduction in absolute scope 1, 2, and 3 greenhouse gas emissions.

The firm established energy consumption reduction targets of 2% annually per square metre until 2025, based on a 2019 baseline within comparable property portfolios, which resulted in an 11% decrease in weather-adjusted energy usage per square metre compared to 2021. This achievement was facilitated by the technical expertise of local teams.

It also established a goal to reduce water consumption by 1% per square metre annually until 2030, using 2019 as a baseline. This saw a successful outcome with an average 5% of water savings in targeted buildings due to the installation of efficient fixtures and its customer nudging program. This is impressive progress in the first year of establishing targets.

On the social side, the firm will offer 5,000 apartments as inclusive housing by 2026 (covering affordable housing and social leases). Additionally, it will offer 240 inclusive jobs by 2026. Overall Heimstaden continues to push ahead with sustainability efforts, and as such progress is evident within the data. It continues to expand targets in energy efficiency and water and also in the social category supporting vulnerable groups. The firm continues to position itself as a sustainability leader in European real estate investment trusts.

Action

Happy to hold and monitor progress.

Argenta Spaarbank (ARGSPA)

Issue

We engaged given the lack of net zero targets or plans. We pushed management on whether it could produce credible net zero plans within an 18-month timeframe - this is important given the changing regulations surrounding sustainable investments.

Response

Overall, the response was encouraging with management confident it can adhere to our timeline. Management highlighted it has invested a lot in data collection over the past year. The firm has formulated a transition pathway based on SBTi (path building and validation) and is conducting strategic workshops on ambition levels, KPIs and actions. Currently, these are not ready for external publication as some workshops are ongoing and will need board approval. It confirmed it will be compliant with the obligatory Pillar III reports on 30 June 2024. In the annual report on 2024 (to be published in 2025) the company said it will be compliant with the corporate sustainability reporting directive.

Action

Constructive response. We will re-engage in six months for an update on progress.

 

 

 

Useful links

Stewardship Code - 2022

Our Engagement Policy

ESG at TwentyFour - Integration and Engagement

Stewardship Code - 2021

Stewardship Code - 2020