Pension scheme says industry moving towards influencing debt issuers on ESG factors, requiring investors to “get smarter” on ESG reporting.
The UK’s BT Pension Scheme (BTPS) is working with its credit managers on sustainability as it moves away from equity exposure in favour of debt as its members become pensioners, requiring predictable cash flows to meet its liabilities.
Engagement on ESG in fixed income is historically less developed than with equities but asset owners such as UK pension plan Railpen are looking to change this through their leadership of the Institutional Investors Group on Climate Change’s (IIGCC) Bondholder Stewardship initiative.
The IIGCC Bondholder Stewardship initiative represents asset owners and managers and is comprised of nine core members representing £2.66 trillion (US$3.2 trillion) in AuM, including Allianz Global Investors, Eurizon Capital and Phoenix Group among others.
The aim is to improve governance for bondholders, while providing practical guidance and a collaborative, structured and best practices-led approach to bondholder stewardship.
BTPS is a leading participant in another debt-focused initiative, ASCOR, which is aimed at improving investors’ understanding of the climate risks in their sovereign debt portfolios.
Consistency on reporting
Speaking to ESG Investor, Wyn Francis, CIO at BTPS, now rebranded Brightwell, said bondholders could be more impactful than equity holders in engagement.
“If you don’t lend to an organisation, they can’t fund their business,” said Francis. “You can hold an equity into perpetuity, and you might be able to have an influence on it. But arguably, if a company needs funding for their business and that source of funding is limited or cut off – you can be influential there too.”
Francis noted the investment industry was increasingly moving towards influencing debt issuance on ESG factors, with asset owners working closely with their asset managers where they hold both equity and debt in investee firms in an effort to exercise greater influence.
“We can work with them to understand from that credit angle and what the implications are,” he said. “It’s very much an iterative process with the managers on what we need them to be working with us on to really exert some of that influence.”
M&G, one of BTPS’ bond investment managers, is meeting with a large mining company on carbon reporting, Francis told ESG Investor. The focus in these discussions has been around Scope 3 greenhouse gas emissions measurement and reporting, he said.
Looking wider at ESG reporting, Francis said that the industry needed to “get a lot smarter”.
“It’s just becoming onerous to point where you lose the weight or influence on reporting. I feel it is starting to become a diversion from actual real-world outcomes.”
Francis said that to challenge this it was putting pressure on its managers to report consistently on key metrics, such as carbon emissions.
“We really engaged with managers last year about the information that we wanted,” he said. “There’s been some improvement, but there is a long way to go. There’s an industry pressure that we need to start exerting more.”
In April, BTPS management rebranded as Brightwell and announced its first external fiduciary management deal with the defined benefit sector of the EE Pension Scheme.
Francis said Brightwell was launched because BTPS felt that advice in the pension world was really fragmented.
“In my experience if you don’t have an integrated approach, that is value leakage for pension schemes,” he added.
