As part of the PRI’s commitment to provide further guidance on responsible investment practices in specific asset classes, it has today launched ESG Engagement for Fixed Income Investors: Managing Risks, Enhancing Returns, which shows that bondholders are increasingly engaging on environmental, social and governance (ESG) factors in order to better manage investment risks.

With bond markets totalling over US$120 trillion, fixed income investors have a critical role to play in putting a price on risk drivers such as climate change, labour disputes and corporate malfeasance to protect the value of their clients’ and beneficiaries’ investments.

A review of PRI reporting data from 422 investors that reported in 2017 indicates that, while fixed income engagement is still a nascent practice, it is growing in popularity. Two-thirds (66%) of signatories engage with at least one type of issuer, albeit typically in relation to a small proportion of their total fixed income holdings. A much smaller number of signatories engage systematically across a large proportion of their fixed income portfolios.

This guide highlights how to engage with bond issuers on ESG factors to identify and manage ESG-related risks, and increasingly to maximise positive ESG outcomes as well. It focuses on ESG engagement with companies – including financial institutions – as opposed to government and government-related issuers. Several case studies are also included to provide practical guidance to investors.

Finally, the guide includes commentary from law firm Reed Smith, focusing on the contractual and regulatory framework governing such engagement.

“The fact is that ESG issues can and do impact fixed income investment returns,” said Kris Douma, Director of Investment Practices and Engagements at the PRI. “But ESG risks need to be managed and addressed via integrated research and engagement programmes. As vital sources of capital, fixed income investors can exert significant influence over issuer disclosure and risk management practices that directly relate to the accuracy of their analysis, and impact risk-adjusted returns.”

“We believe that engagement is a crucial part of ESG-focused investing and that this shouldn’t be the domain of equity investors alone,” noted Scott Mather, CIO, Core Strategies, PIMCO. “As a former Chair of the PRI bondholder engagement working group, and given that we are significant lenders of capital, at PIMCO we understand that bondholders have the potential to influence business practices.”

Notes to editors

While this guide focuses on how investors can better engage with corporate bondholders, suggestions on how to develop an active ownership policy, assess external managers and service providers, and improve disclosure can be found in the PRI’s recent publication Practical Guide to Active Ownership in Listed Equity.

The PDF is also available here