One of the challenges fixed income investors face when adopting sustainable investment principles is that bond investors never own shares in the company and so have no voting rights at annual general meetings or ability to directly impact the policies a company pursues in the areas of sustainability.
In this way it could be said that fixed income bond fund managers are similar to passive investors, choosing the securities in which they want to invest that meet the criteria for sustainability, but theoretically unable to wield any influence over how and whether those policies are implemented.
But Thede Rust, head of emerging markets debt at Nordea, says the key is that almost all bond issuers roll over the debt, that is, they pay the interest on the bonds, but then when it comes time to repay the principal, a new bond is issued to do this, rolling the debt over.
Rust says this enables fixed income investors to exert influence on how a company is run, as the companies are likely to issue new bonds in future, so will need to show they have deployed the capital they previously raised in line with the expectations of the bond buyer.
Engagement to drive change
Andrew Lake, head of fixed income at Mirabaud, acknowledges that bond fund managers have been slow at exerting this power, and are “playing catch-up” compared with equity counterparts, but says: “I have been surprised more recently at how much these firms want to talk to us, especially in the fossil fuel areas. I have had around 20 one-to-one meetings with companies in those sectors, and in the transport sector over the past year.
"Those companies know they need to change, and they are changing, even some of the quite small companies in the sector now have a dedicated person looking at sustainability issues, and as bond fund managers we work with them as we know they need to raise capital now and in the future.
"Our role is firstly to make sure that what they say is credible, for example, many firms issuing bonds will say their target is to be net zero by 2030, but of course we need to monitor that they are moving towards that goal now. There is no point in them starting that process in 2029, because simply that wouldn’t be enough time, so we work with them now.”
In terms of what a fixed income bond portfolio looks like, he says: “We would have bonds of various different maturities, but you wouldn’t have very short-dated bonds in a sustainable portfolio, as there wouldn’t be enough time until the bond matures to make an impact.”
While investing in companies in order to drive change is something that Lewis Aubrey Johnson, head of fixed income products at Invesco, says is laudable, he cautions that many clients “wouldn’t feel comfortable” being invested in companies that are too early in the process of changing, and this can restrict the options available to investors.