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ESG: Fixed interest investors can make the world better too

Sustainable fixed interest investors should expect fund managers to engage with bond issuers, just as equity managers do with companies. Pendal credit ESG analyst MURRAY ACKMAN explains

ESG “engagement” has long been a feature of successful equity investing.

Now it’s becoming an important tool for fixed interest investors seeking to manage risk and drive change, says Pendal’s Murray Ackman.

“Engagement” refers to dialogue between investors and investees that seeks to improve policies or public disclosure on social, environmental and governance matters.

Engagement is not just intended to create a warm, fuzzy feeling — it’s designed to make change. And there’s plenty of evidence such change is linked to better financial performance.

Engagement is not just for equity investors though.

Since large parts of the market are unlisted, fixed income investors are discovering they have a critical role influencing investment decisions and driving change at some of the world’s most important companies.

“Look at the biggest players in the climate transition — most of the utilities, many of the infrastructure owners — they are not listed entities,” says Ackman, a credit ESG analyst at Pendal.

“But they issue debt — so we have access to influence them.”

Pendal Sustainable Australian Fixed Interest Fund

A defensive bond fund with strong performance and positive environmental and social outcomes.

Ackman says Pendal’s Income and Fixed Interest team has undertaken 73 engagements so far this year, topping the figure from the previous year in less than eight months.

A different approach

Fixed income engagement is a different operation to the direct engagement and annual meeting voting rights enjoyed by shareholders, he says.

“We’re not owners. We don’t have that direct line.”

But fixed income investors have some important advantages, he says.

“For starters, we have longer time frames — if we’re looking at 10-year bonds, we want to determine what the risk is of stranded assets in that time.

“In fixed income we don’t have the potential for a big gain in one name to potentially offset a series of losses. When you have a portfolio where you need the cumulative effect of basis points here and there to outperform the benchmark, any downgrade can be significant on performance.”

De-carbonisation

Many of Pendal’s engagements this year have focused on the ambition of an issuer’s carbon emissions targets.

“For companies whose scope one and scope two emissions are mainly related to electricity use, they are going to have a natural reduction in emissions by nature of how the grid is transforming to have more and more renewables.

“For us to be excited, we want you to have a trajectory that is quicker than what the grid is doing anyway.”

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Regnan Credit Impact Trust

Better reporting

Another factor is pushing for improved reporting.

“The technical word is ‘additionality’ — if your project did not happen, what would be the difference?”

As well as directly with issuers, fixed income engagement also operates through the banks and other lenders who are the crucial links in both initial lending and the trading of debt on secondary markets.

“By regularly talking to the banks and arrangers about what our expectations are, they can say at the very early stages if a deal is not going to fly.

“We are very explicit about what we want and don’t want to see in deals, and we make that known on investor calls.”

Ackman says ESG expectations are evolving rapidly and new regulations are being introduced, “so what was best practice a couple of years ago might not be in future”.

Pendal’s fixed income engagement is primarily concerned with three issues: the risk of stranded assets, the pricing risk of credit downgrades and the credibility of sustainability-linked issues.

“These discussions have been from the coal face all the way up to the executive level.

“We’ve found issuers are increasingly literate on ESG matters and we’ve seen our frank advice being acted upon,” says Ackman.


About Murray Ackman and Pendal’s Income and Fixed Interest boutique

Credit ESG analyst Murray Ackman joined Pendal’s Income and Fixed Interest team in 2020 to provide fundamental credit analysis and integrate Environmental, Social and Governance factors across credit funds.

Murray has worked as a consultant measuring ESG for family offices and private equity firms and was a Research Fellow at the Institute for Economics and Peace where he led research on the United Nations Sustainable Development Goals.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

The team’s awards include Lonsec’s Active Fixed Income Fund of the Year (2022) and Zenith’s Australian Fixed Interest Manager of the Year (2020).

Regnan Credit Impact Trust is a defensive investment strategy that puts capital to work for positive change.

Pendal Sustainable Australian Fixed Interest Fund is a defensive Australian bond fund that delivers market-leading performance with positive environmental and social outcomes.


This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at August 17, 2022. PFSL is the responsible entity and issuer of units in the Regnan Credit Impact Trust (Trust) ARSN: 638 304 220 and Pendal Sustainable Australian Fixed Interest Fund (Fund) ARSN: 612 664 730. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Fund and Trust are available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund or Trust or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information. Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance. Any projections are predictive only and should not be relied upon when making an investment decision or recommendation. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections. For more information, please call Customer Relations on 1300 346 821 8am to 6pm (Sydney time) or visit our website www.pendalgroup.com

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