Institutional bond investors are focused on mitigating portfolio-level climate risk but are uncomfortable committing to action aimed at limiting global warming itself, according to research carried out by ShareAction.

Bond investors “balk at the suggestion they might use their ability to refuse to refinance company debt to press for stronger climate action”, stated a report from the campaign organisation.

In its opinion, corporate bond investors should wield the power they have during debt refinancing and issuance to push issuers to align their business strategies with the internationally agreed global warming goal. This would involve telling issuers they would stop investing in their bonds if they did not meet their demands.

Wolfgang Kuhn, author of the report, said: “Bond investors have come a long way very quickly on the sustainability dimension. What is left is to realise the power they have to create a positive impact and muster the courage to use it.”

Kuhn is a ShareAction fellow and former head of pan-European fixed income at Aberdeen Asset Management.

ShareAction called on signatories to the Principles for Responsible Investment and Climate Action 100+ – an investor initiative to put pressure on large corporate greenhouse gas emitters to drive the clean energy transition – to “engage and escalate” across all asset classes, not just equities.

Asset owners should “not blindly rely on asset managers to undertake their fiduciary responsibility in this area” but should discuss with their fund managers a robust engagement and escalation strategy for high carbon issuers across all asset classes, including corporate bonds.

More specifically, according to ShareAction, corporate bond investors should join forces as their engagement would only be effective in collaboration.

To date, 310 investors with more than $32trn (€27.9trn) in assets under management, including major European asset owners, have committed to Climate Action 100+.

Investors see challenges 

The research process entailed 22 in-depth interviews with asset managers, asset owners and other corporate bond market professionals, aimed at exploring their attitudes to engaging with issuers about climate change.

A small number of those interviewed said they would stop investing in a company’s bonds if the issuer did not deliver on certain criteria, but the majority “saw only challenges”, said ShareAction.

They had concerns about the legal implications of engaging jointly, the effectiveness of collaboration, and “publicity”. ShareAction called on regulators to act to reassure investors on legal risks.

At the same time, investors acknowledged that the threat of selling an issuer’s bonds or refusing to refinance their debt could influence the companies.

Bond managers cited a lack of clarity from asset owner clients on how to manage climate-related risks. The complexity of climate change and a lack of useful reported data were also highlighted as issues.

ShareAction’s report comes as the UK’s Financial Reporting Council has proposed expanding the scope of stewardship to asset classes such as fixed income. Unveiling a draft new stewardship code for consultation, the regulator said asset owner and asset manager signatories should “explain their policy on bond engagement, including the extent to which they engage pre- and post-issuance of bonds”. 

According to Schroders, the world is currently on course for a long-run temperature rise of 3.9°C as of the end of 2018, down from a 4°C trajectory it calculated in the third quarter of 2018. The asset manager adjusted its expectations for the pace of global warming in response to higher carbon prices and increased political ambition to tackle climate change.