In abrdn’s case, we often find that our Fixed Income active engagement with non-listed issuers is the first time they’ve discussed ESG topics with an external stakeholder. abrdn’s Fixed Income team manages more than £130bn of assets as at 30 June 2024.
While many investors have protocols for engaging with listed equity holdings, this is, to its knowledge, the first time an asset manager has published a roadmap for engaging with companies whose bonds it holds. With global bond markets worth approximately $141tn*, there is clearly huge scope for investors to engage with bond issuers on Environmental, Social, and Governance (ESG) best practice.
This strategic initiative reflects abrdn’s commitment to sustainability across all its asset classes, as well as a recognition that ESG factors will be critical in determining the long-term success of bond issuers.
Marianne Zangerl, Deputy Head of Fixed Income and Head of ESG – Fixed Income at abrdn, said: “It seems that a huge number of bondholders do not realise the power they have to drive positive change – while also boosting the resilience of their portfolios. When we talk about investor engagement, many will automatically think about shareholders. Yet at abrdn, we recognise that bondholders, as significant providers of capital, can also benefit from and effectively drive change through ESG engagements. After all, most primary-market financing occurs in the debt market – giving debt investors significant opportunities for engagement.
In the fixed-income world, we deal not just with public companies but also private entities, high yield issuers, government municipalities, infrastructure projects and housing associations. This gives us great scope for driving positive impact. Often our engagement with non-listed issuers is the first time they’ve discussed ESG topics with an external stakeholder and our impact can be more influential than with large, publicly listed companies.”
Why engage?
Engagement provides a forward-looking view on the management of ESG risks, opportunities, and the ability to encourage best practice standards among bond issuers that could enhance value.
For fixed income investors, an issuer’s cost of capital is a crucial metric that reflects their financial health and access to financing. ESG considerations now factor into an issuer’s cost of capital, so engaging with them to understand their ESG risks and implement best practice is key. Ultimately this aims to help bring down their cost of capital.
Engagement strategy and approach
- abrdn aims to engages with companies on factors affecting long-term success, using stewardship experience across geographies and asset classes.
- Our thematic engagement roadmap aims to offer transparency and involves setting, tracking, and updating milestones with issuers.
- If milestones do not progress satisfactorily, abrdn may escalate the issue, for example, by writing to the board or collaborating with Equity colleagues to vote against management, as part of their strategy to protect long-term value.
Thematic engagement priorities
- Corporate governance: At abrdn, we view good corporate governance as crucial for spotting opportunities and reducing default risk, with a 2023 Moody’s report highlighting its importance in over 80% of ESG-related rating actions. Our focus areas include board quality, diversity, risk management, and transparency.
- Decarbonisation: Decarbonisation is vital for meeting 2050 net-zero targets, requiring an estimated annual investment of $9.2 trillion. Fixed income investors play a significant role in financing and supporting emission reduction and a just transition.
- Biodiversity: The outcomes of the UN COP15 biodiversity summit underscore the necessity of halting biodiversity loss by 2030. Focus areas include pollution, land use changes, and natural resource consumption. There is a lack of standardised biodiversity data so engagement with issuers on biodiversity is particularly important. These risks have the potential to be financially material but are poorly reported on in sustainability reports and issuers lack metrics.
- Labour: Labour issues have become central post-COVID-19, with evolving workforce dynamics and the need for reskilling due to AI and the just transition. In developed markets, the focus is on hybrid work and addressing wage disparities, while in emerging markets, formalising informal sectors and enhancing labour rights are prioritised.
- *As of 2023, Sifma, the US securities trade body, estimates that the size of global bond markets to be approximately $140.7tn compared with $115tn for global equity markets.
- Capital Markets Fact Book, 2024 - SIFMA - Capital Markets Fact Book, 2024 - SIFMAOpens in new window