Sustainability
At TwentyFour, environmental, social and governance (ESG) analysis is integral to our primary goal of delivering capital preservation and performance to our clients.
We believe engagement should be a constructive, active dialogue between investors and companies on all aspects of their ESG performance.
While fixed income investors do not have voting rights in the way shareholders do, larger firms typically issue bonds multiple times a year, which puts bondholders in a strong position to be able to influence corporate policy by engaging with management on an ongoing basis.
At TwentyFour we aim to engage regularly with the management of every issuer whose bonds we hold in our portfolios, to better understand their ESG strengths and weaknesses, monitor their direction of travel, and overall encourage better ESG practices.
As part of our commitment to the UK Stewardship Code we publish a quarterly summary of our engagements with bond issuers, along with details of any resulting investment decisions, at the bottom of this page.
ESG investing is a fast-evolving discipline, and approaches can vary markedly from manager to manager. We therefore believe this makes the quality of the ESG data used in different scoring systems critical to outcomes, and even more so in fixed income, where we think data provision is improving but still well behind the level we see in the public equity markets. Because of this, we regularly engage with our external data providers and push them to extend their output.
We take our stewardship responsibilities seriously and look to always act in the best interests of our clients. We conduct a significant amount of due diligence on issuers with whom we invest, which enables us to avoid companies we believe do not meet our high standards in strategy, performance and/or ESG factors.
The general principals of our engagements are not fund or geography specific. Global fixed income markets are large, diverse, and complex. As such our approach is designed to retain a dynamic approach to serving our clients’ needs. In general we will engage on any topic as and when we feel it is in our clients’ interests to do so.
Investment or ESG issues can arise post-investment, and where we are concerned about specific ESG matters, management behaviour or treatment of bondholders, the portfolio managers will engage with the appropriate senior management or board member of the company involved. Within our proprietary ESG model, housed in our Observatory portfolio management system, we have a template which enables portfolio managers to log any company engagement by the following steps:
Our system is also able to capture and log any associated email correspondence, write-up, blog or any other related documents to build a detailed history of our engagement with every bond issuer.
We generally keep such discussions private as we believe better outcomes can occur this way, but we have on occasion published blogs discussing issues that we have found difficult to resolve and we felt deserved to be brought to our clients’ or the broader market’s attention.
For example:
Generally, if we have not been able to resolve an issue satisfactorily, we would not invest in bonds issued by those companies, however we would continue dialogue to ensure, as far as possible, the company in question understands why we are not investing in its bonds and that we are kept up to date with any developments including changes in management behaviours. If we are already invested in the bonds, it is possible the matter will result in us exiting the investment, at which point transparency may be delayed to avoid compromising the interests of our clients.
As a signatory to the existing FRC UK Stewardship Code we publish quarterly on our website the following engagement information:
Number of Borrower meetings / updates
Number of corporate actions
Summary of Corporate engagements
We engaged BNP Paribas regarding its gender pay gap, which it publishes for the UK. The figure is on the high side relative to what we would expect and at 37.8% it has increased in the past year rather than narrowing.
Investor relations (IR) provided insights into why the pay gap remains high. They explained that there are more men in senior positions and front office/technical roles, which also contributes to the high gender bonus pay gap. IR highlighted that the bank's London branch is on par with the industry average, comparing to companies like Barclays UK and HSBC UK, and is better positioned than Goldman Sachs UK. To address the gender pay gap, IR outlined several initiatives focused on recruitment and early career development aimed at achieving a 1-to-1 gender balance. Additionally, the firm has numerous DE&I committee efforts in place to tackle these issues.
The response from BNP Paribas was considered satisfactory; they indicated an awareness of the gender pay gap issue and have taken initial steps to address it. However, although we think there is significant scope for improvement we accept that achieving a meaningful change will take time. We will therefore continue to monitor for progress.
We attended Mobico's results call to understand its latest financial performance, its approach to operational and balance sheet challenges, and management's view on the company’s hybrid call date.
Management reported improved financial results. However, they indicated little progress on the sale of the US school bus business, a critical step for reducing the company's leverage, which has been a talking point for the past year. This lack of progress raises concerns about management's commitment to right-sizing the balance sheet. When questioned about their intentions regarding the hybrid call, the new CFO initially stated Mobico did not intend to call the instrument and that it would be left outstanding. Further probing revealed a lack of understanding of the instrument's timing, call features and the implications. We re-engaged with management, and the CFO clarified that she misspoke and that the company would evaluate options as the first call date approaches. Despite this clarification, overall we thought the response was questionable and in our view it seems more likely that the initial statement reflects management’s true intentions. The CFO's apparent lack of understanding and different approach regarding the hybrid compared to the previous CFO are concerning in our view. Earlier in the year, during a call with both the outgoing and incoming CFOs, they emphasised their commitment to call/evaluate their options. The apparent shift in her stance in such a short period does not give us confidence in the instrument.
The lack of coherence on the US business sale and the approach to the hybrid instrument, coupled with management changes, we think raises questions about the company's governance credentials. Consequently, we will look to exit our position when we think market conditions are favourable.
We engaged with the US collateralised loan obligation (CLO) manager on carbon emissions for the underlying loans in its CLO pools to understand their efforts in improving disclosures. We requested their responses to the ELFA ESG questionnaire and pushed back on the lack of industry exclusion language in the CLO we were evaluating.
Neuberger Berman provided the requested questionnaire and included the requested exclusion language. It uses Trucost, a specialist in environmental data which has measured carbon emissions since 2000. Beyond carbon emissions, Trucost also assesses waste, recycling, water, and other emissions, offering a comprehensive view of a company's environmental impact. This third-party data, along with other environmental characteristics, is integrated into Neuberger Berman's proprietary ESG score, the NB ESG Quotient. Additionally, Neuberger Berman review carbon footprint metrics and intensity, and engage with issuers on financially material environmental risks. This engagement focuses on encouraging issuers to disclose and measure their Scope 1, Scope 2, and material Scope 3 emissions. Neuberger Berman support frameworks such as the Task Force on Climate-related Financial Disclosures (TCFD) and the International Sustainability Standards Board (ISSB), which includes the Sustainability Accounting Standards Board (SASB) for best practices.
We were satisfied with the response and do not see the issue as a barrier to investment.
We joined a new issue call for FACT, a Porsche deal backed by Austrian loans and leases on new and used vehicles, focusing on the deal's environmental characteristics.
VCL provided strong ESG data, including Euro 5/6 emissions and CO2 emissions, which are higher standards than previously seen for Volkswagen, the parent company of Porsche. The new issue shows a high proportion of electric and hybrid vehicles at 33%, compared to the 23% we saw in a recent German auto deal from Volkswagen itself. Overall, this deal has higher-than-average environmental factors due to the significant exposure to electric and hybrid vehicles which we think is further helped by good data transparency.
We were satisfied with the response and do not see the issue as a barrier to investment.
CNP Assurances has set ambitious climate targets, aiming to reduce its carbon footprint by approximately 25% by 2030. We sought to understand their progress towards these targets.
CNP Assurances emphasised its commitment to setting numerous short-term targets to maintain management accountability. It has a strong track record, having never missed or extended a target. Despite not being fully compliant with the Science Based Targets initiative (SBTi) due to the complexity of ensuring its entire balance sheet meets SBTi criteria, CNP Assurances is committed to the Net Zero Insurance Alliance. This alliance is a part of its broader strategy to achieve net-zero emissions by 2050, aligning its investment and insurance portfolios with the goals of the Paris Agreement. The company highlighted several key initiatives and milestones in its journey towards reducing its carbon footprint:
1. Investment strategies: Incorporated ESG criteria into investment strategies, prioritising reducing the portfolio’s carbon footprint.
2. Operational improvements: Undertaken various operational improvements to reduce energy consumption and enhance efficiency across facilities.
3. Stakeholder engagement: Actively engaging with stakeholders, including policyholders and investors, to promote sustainable practices and transparency.
Based on the information provided, we are satisfied with CNP Assurances' commitment to its climate targets and its transparent approach to achieving these goals. We are confident in its ability to meet the objectives and therefore do not see the issue as a barrier to investment.
