Engaging Fixed Income Issuers on ESG Topics

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  • 03 mins 49 secs
In Neuberger Berman’s ESG Fixed Income Engagement Report, our Developed Markets Corporate Credit research team outline why material ESG factors have a meaningful impact on credit quality, the value of issuer engagement and how ESG engagement can reduce the credit risk of a portfolio while also affecting positive outcomes for people and the planet.

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Engaging fixed income issuers on environmental, social and governance topics

Jonathan Bailey: I’m delighted to be joined by Chris Kocinski, Steve Flaherty and Steve Ruh from our Developed Market Corporate Credit team. Welcome. You, collectively, have put together an ESG engagement report for Fixed Income, which I think is a pretty innovative thing for the industry. Tell us a little bit about why you went down this path?

Chris Kocinski: Engagement is core to our investment philosophy as a firm, and in our report we summarized our dialogue with management teams on material environmental, social and governance issues that are relevant to their businesses. We think this was an important step forward for us in terms of our transparency with investors, and we plan to publish a similar analysis at least twice a year going forward.

Jonathan Bailey: So, Steve, ESG’s always been an important part of the investment process. Can you tell us a little bit about how that connects to the engagement topics?

Steve Ruh: We have a proprietary scoring system that we use to assign each issuer in our portfolio an ESG score. As part of that process, we have analysts engage with issuers on key ESG topics that we believe are most important to that issuer. They then develop goals to determine how to mitigate those risks, we track the progress management teams have made toward those goals and ultimately record that progress sin our engagement tracker. Going forward we’re going to record summary stats on our engagement tracker every six months.

Jonathan Bailey: When I was looking at some of those summary statistics in the current report, I was just so impressed by the scale of the engagements the team has undertaken. Steve, can you tell us a little bit about those data points and what they tell us about the types of engagements that have been going on?

Steve Flaherty: Sure. Again, over the last eighteen months, we’ve engaged in approximately 670 ESG specific topics with companies. About half of those were related to governance issues, about a third were related to social, and the remainder were environmental. More important, over half of our engagements were also done at the CEO and CFO level, and, more specifically to the success of our engagement process, over ten percent of those engagements actually led to actionable items for the portfolio.

Jonathan Bailey: I think that last point’s really important because obviously we hope that engagement leads to changes in the behavior of management or the profile of the business, but there are times where that’s not effective, and it’s important to be able to protect clients by moving out of those positions and reducing exposure. What were some of the themes or the key issues that cut across the engagements that you think are particularly important or growing in focus?

Chris Kocinski: The fastest areas of growth for us have been IT security, water management, and recycling, and also community relations. We think these are important emerging risks in our market for issuers and our team is very focused on them. For example, in November we saw a ballet initiative in certain states that would have restricted activity in the Energy sector, and it was very important for our team to be ahead of that in our analytical process.

Jonathan Bailey: Now, there’s a lot of innovation that has happened over the last few years, but what comes next? What’s the, kind of, next range of innovative things you’re thinking about doing?

Steve Ruh: We think that providing transparency to investors on our ESG engagement in very important. And so in addition to our semi-annual publishing of our engagement tracker stats, we’re also going to be publishing papers on topics that we think are most important to the credit markets.

Steve Flaherty: Another area that we’re looking to do over the near term is using our ESG activities to help advance the principles behind the U.N. Sustainable Development Goals. ESG clearly in a process that can be used for the betterment of people and society, and we think the framework of SDGs allows you to formulate that process.

Jonathan Bailey: Well I think it’s really exciting, and I think the power of a Fixed Income investor and particularly the work that’s been done on the credit side is a real space for innovation. So thanks very much for joining me today, and look forward to continuing to see engagement reports in the months and years to come.

 

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