Everything you need to know about CLOs
At TwentyFour, environmental, social and governance (ESG) analysis is integral to our primary goal of delivering capital preservation and performance to our clients.
Our research and our experience as a specialist fixed income manager tells us ESG factors can have a measurable impact on asset values, and we believe their influence is only likely to grow in the future.
Our ESG methodology is embedded within our regular investment process across all strategies, and it is also the basis for our more targeted Sustainable funds. We believe this approach helps us target the maximum risk-adjusted returns for our clients while promoting better societal outcomes.
We don’t follow ESG benchmarks or labels. An active sense check is applied at every step of our process, which enables portfolio managers to independently scrutinise the data given by bond issuers and our external data provider.
Our ESG methodology is specifically tailored to the demands of fixed income, with an additional focus given to more nuanced factors such as Momentum (transition), Controversies and Engagement.
Our ESG scoring system is run through the same relative value software TwentyFour portfolio managers use every day – Observatory. This quickly highlights any area of concern which may require further investigation.
Every portfolio manager at TwentyFour is responsible for their own ESG analysis on every investment they make and this work is part of their performance appraisal, ensuring accountability in the application of our ESG process.
The data we use for our fundamental ESG analysis comes from a single external provider. In our view combining data from multiple providers is confusing for all concerned, while a single data source improves understanding.
The rapid growth in ESG’s popularity has been accompanied by confusion around the breadth of definitions and approaches deployed by asset managers. As a signatory to the UK Stewardship Code and the UN’s Principles for Responsible Investment, we are committed to educating investors about our process and giving transparency on our engagements with firms on ESG issues.
TwentyFour’s ESG Committee oversees all our ESG and Sustainable activities. The committee features members from all functions of the business, including several partners, and is chaired by members of our Executive Committee.
We believe it is self-evident that sustainability is a major contributor to long term investment returns.
As a fixed income portfolio manager, our first priority when we purchase bonds on behalf of our clients is that the issuer can continue to pay the coupons and return the principal at maturity.
Therefore, we only want to allocate capital to companies with sustainable business models. Any business making short term gains with unsustainable practices would present a significant risk to our clients’ capital and their long term investment objectives.
We see environmental, social and governance (ESG) considerations as a financial risk to our investments like any other.
Every strategy at TwentyFour is run to a uniform ESG standard, an approach known as ESG integration. This means ESG is embedded right into our regular investment process; our portfolio managers are responsible for performing a thorough ESG analysis on every investment they make.
For investors that wish to go further, we also offer a range of Sustainable funds which are designed to actively promote a range of sustainable objectives.
"ESG isn’t a huge departure from our regular investment process – we look at ESG risks in the same way we do any other risk to our clients’ investments. However, it is important to recognise these are some of the biggest risks facing our world today, and we think they will have a big impact on long term returns."
TwentyFour is a prominent investor in European asset-backed securities (ABS) markets. From our experience the specialist structures and complexity associated with this asset class makes ESG data gathering more challenging compared to more mainstream bond markets, but we have worked hard with issuers on closing this data gap and have also extended our Observatory model to cover ABS-specific metrics. We believe this proprietary ESG work is unique in the European ABS space, and it is well regarded among our clients and other market participants.
As an active manager, we don’t rely solely on external ESG data providers or a standalone ESG team within our business to provide our portfolio managers with an ESG score. For true ESG integration we believe portfolio managers must be accountable for judging how ESG factors will impact the value of their investments over time.
We see this more active approach to ESG scoring as particularly important in fixed income, where commercial ESG data coverage is not as comprehensive as it is in the equity markets.
The TwentyFour ESG Score is therefore a unique measure that combines inputs from our ESG data partner with our own analysis.
The TwentyFour ESG scoring system is designed to specifically suit our active management style because it enables us to place a greater emphasis on more nuanced ESG factors such as Engagement, Momentum and Controversies.
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 influence corporate policy by engaging with management on an ongoing basis. We publish a quarterly summary of all our engagements with bond issuers here (under Principle 9), along with details of any resulting investment decisions.
We also regularly engage with our external data provider pushing to extend their output, particularly in relation to climate change data. We also need to engage with our clients when required, for example in encouraging them to participate in the roll-out of our Environmental and Social sustainability policy.
"As fixed income investors we have the benefit of regular contact with company management, so our engagement can absolutely have an influence on policy. If as capital allocators we can nudge bond issuers towards more sustainable business models, then we'll do so."
We believe it can be counter-productive for asset managers to automatically deprive poorer ESG performers of capital. Instead, we would prefer to support companies that can show us a credible and demonstrable plan for improving the areas in which they score badly, which is why a strong Momentum score can increase an issuer’s overall TwentyFour ESG Score.
In our ESG scoring system, Controversies can hurt a company’s overall ESG score very badly, since we believe they can reveal much about a company’s risk management and general governance culture. One negative event may be unavoidable, so the underlying source of the issue is important, but a series of issues may indicate a systemic risk.
Observatory is the tool that powers our ESG integration approach.
Designed in-house at TwentyFour, Observatory is our very own search engine for the global universe of fixed income – it stores hundreds of data points on over 30,000 bonds and helps us target the relative value opportunities that we think can help boost performance returns.
In Observatory, ESG analysis sits right alongside more traditional bond characteristics like duration, yield and rating – portfolio managers use the platform every day, ensuring ESG analysis is at the core of our regular investment process.
Observatory also enables us to report to clients on several criteria across our portfolios, ranging from the percentage of women on boards to carbon emissions intensity.
For asset managers, stewardship is the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society.
For us this means engaging with and monitoring the companies in which we invest to address risks and identify opportunities for our clients, and being transparent in our approach. It also means working with regulators and our industry peers to try to tackle systemic risks and promote a well-functioning global fixed income market.
To ensure we dedicate the necessary resources to stewardship, we make portfolio managers responsible for stewardship activities just as they are responsible for our investment process. Like ESG analysis, stewardship forms part of every manager’s ongoing performance appraisal. We believe there is no better way to integrate stewardship within our investment process.
TwentyFour is a signatory of the Financial Reporting Council’s UK Stewardship Code.
We are active participants in collaborative efforts to optimise the overall functioning of fixed income markets and improve the quality of ESG data and reporting in our asset class. TwentyFour is a member of the European Leveraged Finance Association (ELFA) , which works to develop industry standards and best practice in leveraged finance markets such as high yield bonds and collateralised loan obligations (CLOs). We sit on ELFA’s CLO investor committee, which is currently working to standardise ESG data reporting for CLO transactions and develop a best practice guide for CLO managers on disclosing corporate ESG profiles and internal ESG frameworks.
As a prominent investor in European asset-backed securities (ABS), TwentyFour is a regular advisor to the Bank of England and a member of its Residential Property Forum. We also work with the UK and European regulators on ad hoc matters, as well as advising the UK Treasury, the European Commission and several other EU finance ministries on ABS. We are also the only UK asset manager in the founding partnership of the Prime Collateralised Securities (PCS) initiative. TwentyFour founding partner Rob Ford is vice-chair of the Association for Financial Markets in Europe (AFME) Securitisation Board and is into his fifth term as a member of its Executive Committee.
"As European ABS specialists we believe we have a duty to push for higher standards by engaging with peers and industry bodies. When it comes to ESG, for us that means condemning greenwashing and scrutinising issuers’ long term sustainability plans."
Climate change is a clear and present risk to the global economy and our clients’ investments.
TwentyFour believes it has a responsibility to drive industry change in promoting better environmental outcomes, especially regarding contributing to the development of a net zero carbon economy.
Through our Carbon Emissions Engagement Policy we assess companies’ CO2 intensity and monitor their reduction plans over time, with the aim of reducing both CO2 emissions and production technologies which contribute to climate change and pollution. We also track bond issuers’ commitment to the UN Sustainable Development Goals.
We believe ESG factors such as climate change, pollution and social upheaval are a clear and present risk to our clients’ long term objectives. As an asset manager, we thus have a duty to consider these as part of our regular investment process.
Many of our clients have specific sustainability and ESG goals for their investments and we are pleased to support these with our Sustainable fund range.
However, we are also committed to demonstrating sustainable values as a business ourselves. We are a signatory to the UK Stewardship Code and the UN’s Principles for Responsible Investment, and we have long term commitments to industry level initiatives aimed at improving diversity in asset management. For more detail, please see our Corporate Social Responsibility report.
At TwentyFour we know how important it is to our clients and society at large that we ensure their capital is invested responsibly. ESG and sustainable investment has been one of the fastest moving areas in investment management for decades, and as such we continue to evolve our approach in the best interest of our clients. We will strive to be at the forefront of these developments as ESG becomes an ever more important part of the asset management industry.