There is little appetite for forceful engagement with high-carbon companies among large bondholders, despite widespread awareness of the risks of rising temperatures, find ShareAction’s new report Sleeping Giants – Are bond investors ready to act on climate change?.
The report is based on 22 in-depth interviews with asset managers, asset owners and other corporate bond market professionals to explore their attitudes to engaging with issuers about climate change. It finds that environmental, social, and governance (ESG) risks are well understood by bond investors and consideration of ESG factors is generally already part of their investment processes. However, bond investors balk at the suggestion they might use their ability to refuse to refinance company debt to press for stronger climate action.
Although a small number of those interviewed said they would cease to invest in a company’s bonds if it violated relevant criteria, the majority saw only challenges. When it comes to climate change, bond investors appear to be relying on governments to bail everyone out.
ShareAction is calling on institutional bondholders to assume a more ambitious interpretation of their fiduciary duties, recognising the serious harm to beneficiaries’ interests if global temperatures are not contained beneath scientifically agreed limits. The responsible investment NGO proposes that bond investors work collaboratively to engage with high-carbon emitters, just as shareholders in such companies are already doing. The report recommends regulators clarify such actions would not run legal risks for bond investors.
The report finds that bondholders are focused on mitigating portfolio level climate risk, but are not yet willing to commit to action on climate change itself. Interviewees were concerned about a number of barriers to taking strong climate action:
- The primary concern is over legal and regulatory issues with collaboration among bond holders.
- Bond investors highlight the complexity of climate change and a lack of useful reported data.
- Bond managers also cited a lack of clarity from asset owner clients on how to manage climate related risks.
The paper concludes that the time for “tea-and-biscuits” bondholder engagement is over, and that a stronger approach is needed that sets clear conditions for ongoing refinancing. The report recommends convening an investor group to agree and promote a set of climate-related conditions required for buying future debt from high-carbon companies. A target list of such companies has already been published by the investor-led ClimateAction 100+ initiative. Sectors in focus could include mining, integrated oils, utilities and airports.