Asset owners unable to show effectiveness of bondholder engagement as focus turns to climate indices

Asset owners cannot cite examples of effective bondholder engagement and are confused about how to use fixed income benchmarks to help them achieve their climate goals, according to a major new study.

A survey of 132 pension funds, insurers, endowments and cities by academics at the University of Cambridge found that most were “sceptical” about the climate-related fixed income products currently on the market, and struggled to find any “that suit their specific needs”.

A third (33%) reported facing barriers in gaining access to investment grade corporate bond products, including indices, benchmarks, funds, that aligned with their climate strategies.

The report’s authors said that, while there had been heavy emphasis on how shareholders could engage with companies – both actively and passively – to encourage them to decarbonise, the potential for bondholders using indices was “largely untested”.

“No interviewee was able to share an example of bondholder engagement that had led to corporate behaviour change on an ESG topic,” they said, adding that engagement activity was often outsourced to external managers or service providers and that “asset owners do not have visibility on the goals, techniques or outcomes of this engagement”.

Participants in the study noted practical challenges around engaging with issuers in the primary market, because an investor sometimes has just a few days in which to wield their influence ahead of a bond being issued.

“A number of investors across Europe and North America recognise that their debt engagement approach largely amounts to ‘piggy-backing’: adding the clout of debt assets to conversations led by equity-facing teams,” it noted.

“Some mentioned a limited strand of bond-specific corporate engagement, for example through group investor meetings coordinated by banks, but could not point to outcomes in the real economy.”

The study, which includes an explainer of how different types of benchmarks and indices can be used by asset owners, comes on the back of a consultation on the future of climate indices by one the world’s largest investor groups.

The Glasgow Financial Alliance for Net Zero last week published draft guidelines to help index providers create products that are “better aligned with net-zero ambition and targeted toward real-economy decarbonization,” acknowledging that investors can achieve different objectives through equity and fixed income strategies.

The work was led by financial institutions including Legal & General Investment Management and Danish pension fund PKA.

It explores the need for “transition-potential” and “transition-engaged” products, both of which “go beyond the goal of reducing the carbon footprint of an investment portfolio” by supporting a transition to a low-carbon real economy.

“The indices may include companies at early stages of aligning with the transition to net zero, and support companies to reduce real-economy emissions through targeted financing and escalated engagement,” it said.

The consultation is open until 9 January.

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