Investors with exposure to hundreds or thousands of different issuers may only be able to meaningfully and proactively engage a small proportion of those issuers.

Engagement cases usually fall into two categories:

Proactive: When investors seek dialogue with priority companies to manage more medium/long-term issues based on their analysis of potentially material ESG issues and megatrends.

Reactive: When investors initiate dialogue with companies in reaction to a recent downgrade, controversy or scandal which is presenting a financial and/or reputational risk.

PRI signatories typically prioritise their engagement activity based on one or more of the following criteria:

  • Size of holdings: The largest holdings pose the greatest potential risk to portfolio performance.
  • Credit quality of the issuer: Those issuers with less balance sheet flexibility (such as high-yield issuers) are typically less able to absorb an unexpected deterioration in their businesses due to material ESG risks.
  • Duration of holdings: Investors should focus on debt instrument types that are most exposed to selected ESG factors over a given timeframe; for instance, emissions-reducing regulatory targets will likely not impact three- and ten-year bonds in the same way.
  • Quality of transparency on ESG: Investors should focus on improving understanding of how an issuer is managing, or plans to manage, ESG risks and value creation opportunities in the absence of comprehensive and comparable issuer disclosure.
  • Specific markets and/or sectors: Investors should engage over ESG issues that are most material for the specific market and/or sector. ESG sector materiality frameworks such as the Engagement Guide for Asset Owners and Asset Managers from the Sustainability Accounting Standards Board (SASB) can help focus engagement discussions on sustainability-related trends and uncertainties that are likely to affect the financial condition or operating performance of a company.
  • Specific ESG themes: Engagement discussions should be focused on those topics representing the highest value at risk or potential impact across issuers and sectors. Investor engagements currently managed by the PRI include research and collaborative investor engagement on specific topics, such as the low-carbon transition, water risks, labour practices, cybersecurity, anti-bribery and corruption, and corporate tax transparency.
  • Companies in the lowest ranks of ESG benchmarks: Such companies tend to face the highest financial downside, including significant event risks and systemic risks which can affect issuer creditworthiness.
  • Companies in the highest ranks of ESG benchmarks: Conversely, investors may choose to engage with industry leaders to promote and encourage best practice. ¡ ¡ Specific issues considered priorities for the investor based on input from clients and beneficiaries: Investors should focus on ethical issues or issues misaligned with their clients’ purpose (such as endowment funds).
Examples of approaches to prioritising engagement
Investor  Highlights
 Breckinridge Capital Advisors, Investment Manager, US Breckinridge aims to invest in companies and municipalities that are strategic in their approach to sustainability and clearly prioritise material ESG factors. It determines materiality based on external standards such as those provided by SASB, coupled with its internal sector-level and issuer-level materiality assessment.
 MN, Investment Manager, Netherlands Preconditions for bondholder engagement include that the bondholding belongs to MN’s investable universe/benchmark, lack of transparency (including ESG considerations), and poor performance (including ESG considerations). For instance, MN looks at the recurrence and gravity of financial news stories, how the company responds to and follows up on scandals, and public scrutiny of the company.
 QIC, Investment Manager, Australia QIC’s engagement programme aims to engage with around ten issuers per year in one of three ways:
  • Issuers with advanced ESG practices: QIC prioritises companies demonstrating advanced ESG practices so it can learn from them and encourage their peers.
  • Issuers with weaker ESG practices: QIC assesses the range of ESG ratings within an industry, whether there are common (negative) themes or practices across the industry, the financial and non-financial (risk) materiality of those practices, and whether it is exposed to issuers whose practices are weaker than their peers.
  • Thematic engagement: QIC considers ESG issues that could impact financial returns. Generally, thematic issues will impact all issuers in an industry. We consider how advanced issuers are in their ESG practices so we can learn from the leaders and encourage the laggards.

 

 

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