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
This engagement was conducted as part of our Carbon Emissions Engagement Policy. We engaged with Barclays regarding its exposure to fossil fuel financing after identifying some gaps in its policies. In particular, we found that fossil fuel financing as a percentage of Barclays’ loan book is the highest in Europe. In addition, absolute volumes also ticked up in 2023 after falling in previous years. Regarding financing policies, we asked for some clarification around the phase-out of coal financing and the transition of current oil and gas financing off the balance sheet.
Regarding the tick-up in fossil fuels financing, Barclays clarified that the bank engaged with the Rainforest Action Network (RAN) about its methodology before the report's publication as it does not agree with the classification or attribution of some transactions. According to its audited Annual Report, the bank's TCFD-aligned exposure to high-risk carbon sectors has decreased by 4% year-over-year, covering both carbon-emissive and renewable energy financing. Additionally, recent increases in fossil fuel financing may reflect the need to replace resources lost due to Russia’s invasion of Ukraine. Barclays also clarified that the bank will not finance new clients or existing clients with more than 30% of their revenues from coal mining or coal-fired power generation. This policy will lead to a phase-out of coal financing in the EU and OECD by 2030, and in the rest of the world by 2035. The bank’s Client Transition Framework (CTF) informs decision-making on business and credit appetite, with energy companies failing to reduce emissions or transition facing difficulty accessing financing. By January 2025, energy clients will need to submit transition plans or decarbonisation strategies. The bank has committed to no longer financing new upstream oil and gas projects and expects its energy clients to submit transition plans by 2025 and set decarbonisation targets by 2026. Barclays has established targets for eight high-emitting sectors and has reduced its energy-related emissions by 44% since 2020. The bank aims to provide $1tr in sustainable and transition finance by 2030, with $123.8bn facilitated so far. It is also investing in clean tech through its £500m Sustainable Impact Capital fund. Additionally, the Board oversees the strategy, with executive compensation linked to climate and sustainability performance, reflecting the bank’s ongoing commitment to addressing climate change.
Barclays' response was deemed satisfactory as it outlined a clear and comprehensive climate strategy, including restrictive financing policies, science-based targets, and progress on reducing emissions. We will continue to closely monitor the company's financing of fossil fuels and track its progress against the set targets. We plan to engage with Barclays again in the future to assess whether it is making continued progress on climate-related goals and commitments. Happy to hold.
We engaged with Enel given the low controversies score highlighted by our ESG provider relating to recent controversies. In particular, we wanted more detail on the deadly Italian power plant accident that occurred near Bologna in April 2024.
We had a call with the Enel’s Head of ESG, Federico Baroncelli, who clarified that the incident occurred due to a test on a hydroelectric plant consisting of turbines and alternators. During the test, the turbines are made to spin at maximum speed. The first test went well, while the second test caused an explosion, likely due to the alternator. Immediately after the incident, a process was initiated to ensure that all procedures adopted by Enel were compliant with the standards. To identify the cause of the incident, they used physical inspection and retrieval of black boxes. Since the plant is submerged in water, it was not possible to fully empty it to conduct the inspection. However, six hypotheses were proposed based on the data from the black boxes, all suggesting a mechanical issue likely related to the alternator supplier, rather than errors in Enel's procedures. Due to the lack of a full inspection, this has not yet been confirmed. It will take a few more months to determine this, and answers are expected around February or March. Enel has stated that it is ready to take immediate action if the supplier is found to be at fault. Suppliers are constantly monitored for safety and human rights compliance. On the other hand, if it is found that this was an Enel issue rather than a supplier issue, Enel is prepared to take the necessary health and safety steps internally.
We thought Enel provided a satisfactory and concise response. We have however planned a follow-up call in February to continue to monitor the evolution of the case and verify the actions taken against the supplier if found to be at fault. Happy to hold.
As performance has deteriorated in UK mortgages, particularly those originated before the global financial crisis, we have engaged directly with servicers who manage arrears and help borrowers. We met with Computershare, one of the largest third-party servicers in the UK, which manages legacy mortgage portfolios as well as recently originated owner-occupied and buy-to-let mortgages. We had an on-site meeting in Skipton to review resources, processes and strategies implemented to deal with arrears.
Performance deterioration has accelerated for legacy mortgages (those originated before the global financial crisis) following sustained cost of living pressures and increases in interest rates, as those borrowers are largely paying floating interest rates. While arrears reported have increased, at the site visit we obtained very useful insight on underlying data and how borrowers in arrears are performing, including the behavioural patterns of said borrowers. Computershare has a large team to deal with increasing arrears cases. In fact, it reaches out to all customers in arrears and establishes contact with the majority, for which they find a solution such as setting up a payment plan. For those owner-occupied borrowers whose mortgage is coming to final maturity and who are more than three months in arrears, Computershare will work with the borrowers to proceed with a voluntary sale of the property. Litigation is a last resort measure, as outcomes are more favourable when the borrower can cooperate with Computershare.
While late stage arrears are expected to decrease, repossessions are expected to rise for those legacy mortgages coming to final maturity. This will take a few months to be reflected in the reported data. Therefore we took action and have significantly decreased our exposure to legacy mortgages ahead of any potential market impact. As a result of our engagement, Computershare will also share additional data on arrears, reporting the proportion of monthly payments actually paid by borrowers compared to amounts due, which will allow us to improve our cashflow forecasting for residential mortgage-backed securities (RMBS).
At the end of October 2024 eastern Spain suffered catastrophic flash floods which were particularly serious in Valencia. Given the severity of flooding, we considered its impact on Spanish auto ABS from physical damage of the vehicles and the potential increase in arrears, especially in transactions with large exposures to Valencia. In early November, just a few days after the flood, we engaged with the Head of Financial Services at Stellantis, the servicer of Auto ABS Spanish Loans 2024-1, a transaction backed by a €600m pool of auto loans to Spanish borrowers, in order to understand its strategy to assist the affected borrowers.
We were informed by Stellantis that it will be managing arrears in line with the Spanish government’s measures. The measures include three-month forbearance on interest and principal and an additional nine-month forbearance on principal repayment. Stellantis indicated that the volume of forbearance requests was still relatively small. Additionally, we had clarification that the borrowers will be indemnified under the government’s catastrophic risk insurance scheme, which the borrowers can use to make payments under the auto loans.
While the transaction’s exposure to Valencia and other affected areas is limited, and we don’t expect a material deterioration in performance, we have nonetheless reduced our exposure to limit the potential impact of volatility, particularly in high yield Spanish auto ABS bonds.
We engaged with Deutsche Bank following a controversies flag alleging that it had financed a Queensland coal mine. We asked for clarification as to whether and why the funding went ahead despite the bank’s commitment to not directly or indirectly finance the construction of new coal-fired power plants or new mining projects for the extraction of coal.
Deutsche Bank was unable to comment on any existing client relationships for legal reasons, however its response made clear that it adheres to established policies and procedures in conducting business – suggesting that remains the case with this loan. Deutsche Bank has a set of requirements and guiding principles that it applies to client and business selection processes. As part of this approach, Deutsche Bank conducts enhanced environmental and social due diligence for transactions in the thermal coal power and mining sector. Deutsche will cease financing (lending and capital markets) for companies with a thermal coal revenue dependency of more than 50% that do not have credible plans to reduce this dependency to below 50% by 2025 in OECD countries, or below 30% by 2030 in non-OECD countries. This approach is essential to mitigate and manage negative impacts on the environment or society and to uphold the bank’s commitments to international standards. In this context, the bank has defined criteria for evaluating transition plans for the phasing out of thermal coal. Phase-out from thermal coal is expected for companies in OECD countries by 2030 and for companies in non-OECD countries by 2040.
We have replied asking for explicit confirmation that the loan in question did not constitute a breach of Deutsche Bank’s coal financing policies. Happy to hold and await response.
