Company engagement should happen in fixed income as well as stocks
In my experience, most values- and ESG-oriented investors are generally familiar with the concept of shareholder advocacy, in which stock owners seek to influence company policies and practices.
Multiple fund families and other institutional owners often will come together and speak as one voice, raising the likelihood that a company’s management team and board of directors will listen and take action.
Fewer investors focused on values and environmental, social and governance factors consider the potential to elicit corporate change on the fixed-income side of their portfolio. Those who are aware of this potential may not know the role of green and other positive-impact bonds to further corporate progress.
And indeed, we see the purchase of positive-impact bonds as a primary avenue to affect real-world change. But in addition to purchases themselves, we regularly find other opportunities to pursue change by engaging with companies about fixed-income offerings. In these conversations, we ask additional questions that can spur change.
In fact, at Praxis we use the term “company engagement” as a broad way to refer to both shareholder advocacy and fixed-income engagement. To us, this recognizes the opportunity and responsibility to seek opportunities to engage with companies – regardless of the asset class in question.
Following are three examples of what company engagement can look like on the fixed-income side of the portfolio:
Prompting companies to raise the quality and consistency of their ESG data disclosures.
There are many ESG data providers, among which MSCI and Sustainalytics are leaders. When talking with company representatives before a new bond issuance or on company calls, we’ll often ask about the company’s ESG score or about interactions with ESG data providers. Sometimes, management will tell us the ESG data is wrong. When that’s the case, it’s often also true that the company hasn’t had meaningful interaction with the ESG data provider. MSCI tracks the frequency of interactions with each company. We encourage the company to interact with the largest ESG data providers to ensure their data is accurate. The result will be better data available to all ESG-oriented investors across asset classes. Here’s some very good news: Compared to five years ago, companies are far more cognizant of their ESG ratings, and they generally talk about their multiple interactions with the ESG rating agencies. The fact that less of this prodding is needed reflects its success.
Asking about social factors.
“Social bonds” are a growing component of the positive-impact bond space. Rather than just emphasizing green projects, social bonds relate to projects that promote positive impacts on employees, local communities or other people-related contexts. Companies like to highlight their social endeavors – whether related to a specific social bond or just general company policies – and this gives us an opportunity to ask questions. We may compliment a social factor strength – and ask tough questions about past controversies or current weaknesses.
Raising concerns about greenwashing.
“Voting with our dollars” – and avoiding certain issuances – is the main way we address bond issuances that, by our analysis, are labeled as “green” but aren’t convincingly so. An example was a bond issued to fund the purchase a second company that was a leader in using recycled materials within its main product … but the product itself was hardly green. We did not purchase the bond. We have also asked questions of investment bankers about green bond concerns. It’s been interesting to hear that they, too, are sometimes uncomfortable with labeling. We believe that as we and other institutional buyers express hesitation, bonds will improve and standards will be raised.
Many investors and clients haven’t even thought about the opportunity of fixed-income engagement. They may be pleased to hear that in our experience with engagement on the fixed-income side of the portfolio, companies listen and improvements can occur.
Article originally posted and shared with permission by Praxis Mutual Funds®. Praxis is dedicated to stewardship investing — a philosophy of financial decision-making that balances social and financial considerations and is motivated and informed by faith convictions. Through a suite of equity index funds and an actively managed Impact Bond fund, Praxis seeks to help investors make real-world impact.