Engagement at TwentyFour

Issue

Engaged with Citi following its departure from the Net Zero Banking Alliance (NZBA), primarily to understand whether this signals a shift away from its net-zero commitments. We also raised concerns about Citi’s fossil fuel financing policies, which we thought remained relatively weak despite some encouraging improvements in recent financing data.

Response

Citi provided an update following its decision to exit the NZBA. The bank explained that this move aligns with the evolving focus of the Glasgow Financial Alliance for Net Zero (GFANZ), which is now concentrating on capital mobilisation for emerging markets.

Despite leaving NZBA, Citi reaffirmed its public net-zero commitments established under the alliance and continues to participate in GFANZ, with CEO Jane Fraser actively involved in its Principals Group. Citi expressed disagreement with the methodology used in the Banking on Climate Chaos report, arguing it diverges from credible industry data and takes a less rigorous approach than Citi’s own. 

Citi highlighted its structured process for assessing environmental and social risks, particularly within the oil and gas sector. This includes enhanced due diligence as outlined in its Environmental and Social Policy Framework. Citi’s 2023 Climate Report notes ongoing progress, such as a significant reduction in thermal coal mining exposure since 2020.
 

Action

Overall, the response was considered reasonable and broadly consistent with peers across Wall Street — reiterating a commitment to net-zero targets while showing no significant change in its approach to fossil fuel lending. 

Issue

Attended BP’s strategy update which marked a material pivot from their current business strategy.

Response

BP announced a significant strategic shift, moving away from its previously ambitious investments in sustainable and transition-oriented energy projects to refocus on its core oil and gas business. The company announced it will reduce annual expenditures on renewable energy and low-carbon initiatives, cutting transition investments by more than $5 billion to just $1.5-2 billion per year, while increasing oil and gas investment to around $10 billion annually. Ultimately, they said this pivot is driven by pressure from activist investors demanding stronger returns and voicing their concerns over the profitability and pace of clean energy investments. CEO Murray Auchincloss has labelled this as a “fundamental reset,” pointing to the continued global need for affordable and reliable conventional energy. As a consequence, BP has abandoned earlier commitments such as targeting a 40% reduction in oil and gas output by 2030 and scaling up renewable capacity 20x.

Action

BP’s shift away from sustainable investments marks a clear retreat from its energy transition ambitions and has drawn criticism from environmental groups. While the move prioritises oil and gas and aims to strengthen the balance sheet, we think it underscores a pivot toward shareholder returns over climate goals. We’re comfortable continuing to hold BP in our non-sustainable funds, however, we have downgraded the company’s environmental score in light of this strategic shift.

Issue

We re-engaged with SGN as it has been over 18 months since our initial engagement following the fatal gas explosion in Thornton Heath which tragically killed a four-year-old girl.

While we have historically liked the credit from a fundamental perspective, this controversy raised serious concerns. It is alleged that SGN received up to 18 calls from local residents reporting the smell of gas prior to the incident, which were not appropriately addressed. Our engagement focused on understanding the cause of the incident, SGN’s remedial efforts, community support, and the potential scale of any future financial liability.

Response

The incident remains under investigation by both the police and the UK’s Health and Safety Executive (HSE), and management stated they are legally unable to comment further at this time. The fact this investigation is still ongoing does raise some concerns for us though.

While the investigation remains overhanging, significant uncertainty remains, including the root cause, responsibility, and the scale of any financial or reputational fallout. The allegations that SGN may have ignored early warning signs are particularly troubling and could lead to substantial public and regulatory backlash once the findings are released and the allegations upheld.

Action

Do not invest, the investigation is taking a considerable amount of time which we think raises some suspicions that negative findings will be forthcoming.

Issue

We had a meeting with the Santander team to review lending criteria ahead of their latest Consumer loan securitisation, following a deterioration in collateral performance.

Response

Santander acknowledged the underperformance, driven by 'pre-approved' consumer loans due to a commercial objective to attract more business to the bank. In the last quarter of 2021, the bank cut the waiting time to access pre-approved loans from 6 to 3 months, allowing newer customers of the bank access to pre-approved loans.

Outside of the pre-approved criteria, Santander explained that general cost of living pressures and macroeconomic conditions have placed pressure on consumers in Spain, contributing to weaker performance. 

In response to said performance, Santander have increased minimum internal credit scores for the consumer loan methodology, and have made adjustments to risk appetite and lending criteria to help improve performance. Santander reiterated their flexible approach to lending, pointing out the agility of their credit model and lending standards.

Action

We were disappointed with performance, particularly against some peers, and vocalised this with the team. We are satisfied with the tightening in criteria from the credit team and understand the lag that there will be in the performance data for securitisations. We take comfort in the strength of Santander as an issuer and the swift approach to tightening standards so we will continue to engage to monitor the issue.

Issue

We met with the Redding Ridge team to confirm alignment of interest between the CLO manager and ourselves (investor) in the equity tranche of a CLO new issue; this was a minority equity position and Redding Ridge are a top quartile, established CLO manager who has extensive history in Europe.

Response

We take comfort in the fact that Redding Ridge retain the majority equity here, increasing alignment of interest during the life of the transaction. Redding Ridge have their own risk retention vehicle and have a conservative strategy, focusing on capital preservation.

The leverage in the Redding Ridge CLO transactions is also lower than market average, due to the absence of a 'B' tranche from their transactions, allowing for median equity returns whilst running a relatively low risk strategy. 

During our meeting, we assessed recent trading activity of the manager and sector allocation, ensuring we are aligned with the risk appetite of the vehicle. Additionally, we engaged on documentation to ensure we thought the equity was sufficiently flexible. As a manager, Redding Ridge have demonstrated to us their support for consistent and conservative documentation across transactions, enhancing our visibility of the transaction’s expected behaviour.

Action

This was a strong engagement. We were satisfied with the risk appetite and management style of a Redding Ridge team who look to provide expertise and stable returns to build a CLO equity position in the funds. We will continue to engage with the manager over the life of the transaction to monitor their and the transactions’ performance.