Can credit investors really deliver meaningful, measurable impact?

As active managers, we believe in engaging with the companies that we invest in to drive the transition to a sustainable economy. Whether it’s equity investing or credit investing, we believe steady engagement can drive real life change. Listen to our latest podcast to learn the rationale behind this, what we ask the companies that we engage with, how we choose between investing or divesting and how we track the effectiveness of our engagements.

Moderator:
Daniel Whitaker- Senior Associate, Institutional Investment Team

Speakers:
Danny Decker- Lead sustainability expert
Lizelle du Plessis- Director Fixed Income Portfolio / Fund Management

Transcript

[00:03–00:18] Daniel: Sustainability is an integral part of our Euro Credits investment franchise, and engagement is a key pillar within our investment philosophy, acting as a differentiating factor for us when compared to our peers. So engagement with companies is not just something for equity

[00:18–00:34] investors. Bondholders too can initiate a dialogue with a company to encourage positive change. With this in mind, sometimes bondholders even have an edge when engaging with certain firms. In this podcast, we talk about three critical questions. What do we ask from companies that

[00:35–00:51] we engage with, engage or divest?, and what are the odds that companies actually listen? Before we start, I would like to point out that this podcast is made for professional investors and for information purposes only. It provides insufficient information for an investment

[00:51–01:08] decision and does not contain investment advice. The value of investments and the income from investments can fall as well as rise and are not guaranteed. Investors may not receive the amount originally invested. My name is Daniel Whitaker, Senior Associate within our Institutional Relations team.

[01:09–01:23] And here with me are Lizelle du Plessis, Senior Portfolio Manager of the Sustainable Euro Credit Strategy, and Danny Decker, Lead Expert in the Van Lanschot Kempen Sustainability Centre. Danny, to start off with you, what is the rationale behind engagement?

[01:24–01:37] Danny: Hi, Daniel. The rationale behind engagement is to drive positive real-world change by being active managers. Engagement is one of the instruments active managers have to use their influence. For us, for our organization,

[01:37–01:50] we also do direct engagements done by the portfolio managers, which is quite different compared to many other investors. Next to that, we also do collaborative engagements where also our team is actively involved in.

[01:50–02:06] Daniel: And how does engagement by bondholders differ from engagement by equity holders? 

Lizelle: Good question, Daniel. As bondholders, we are very active investors as well. Last year, we spoke with over 20 companies within our investment universe. Despite the fact that we

[02:06–02:26] are unable to exert pressure through exercising voting rights, companies have been very receptive to our engagement objectives. One differentiating factor, of course, for bondholders is that we invest in bonds issued by non-listed companies. These companies are not subject to the scrutiny from equity investors, giving bondholders the opportunity to take the

[02:27–02:43] lead in the engagement. In the current high interest rate environment, the cost of debt is very important to these businesses, which means that we've got increased leverage and our engagement can have more impact.

Daniel: Do you have any examples of companies where you aim to generate positive

[02:44–03:00] impact? 

Lizelle: We've recently started an engagement with Enexis, which is non-listed and one of the highest greenhouse gas emitting utility companies in our investment universe. We see an opportunity to push the CO2 emission target setting higher on Enexis’agenda. And then another

[03:00–03:17] example is our engagement with Bayerische Landesbank, which we started in June last year. Our objective with this engagement is to get the bank to set targets for greenhouse gas reduction, including intermediate steps, and to get this externally verified by the SPTI.

[03:17–03:32] Daniel: Thank you, Lizelle. And Danny, coming to you, is climate indeed the focus of all your engagement efforts?

Danny: Well, climate takes center stage, Daniel, for sure, but certainly not the only issue we engage on. We also engage on social issues.

[03:33–03:48] So we have social engagement, for instance, Volkswagen. More details to come in our next podcast. But also, for instance, on governance-related engagements, for instance, for remuneration. And Lizelle, can you tell more tell more about for instance Heidelberg

[03:49–04:05] Cement.

Lizelle: Yes happy to do so, but first I'd like to hear an example on climate Dann. 

Danny: A nice example is CEZ which is a Czech utility company and we engaged with them for several years and they had

[04:05–04:19] a net zero commitment by 2050, but they didn't have an incredible path towards that. So it's really about the how in the climate and energy transition. We engaged directly, but also collaboratively via the Climate Action 100 with other investors.

[04:20–04:43] And the focus was really on getting a credible path. And we partnered up with the company. We asked from them really to come up with short and midterm targets and also an incredible face phase-out plan. After years of engagements, they changed the call phase-out plan from 2050

[04:43–04:56] towards now 2033. So that's a serious shortening of the timelines. And the other part is they really came up with science-based targets, which means that the targets on the short and midterm

[04:56–05:09] are also externally verified. So I think that's a clear example that partnering up with the company and other investors can really move the needle in the climate and energy transition. 

Lizelle: That's a great result. And

[05:10–05:22] certainly on my side, then I can add an example on the governance side, Heidelberg Cement that you referred to, Danny. The company is one of the most pollutive companies in our investment universe,

[05:22–05:36] but they have a credible plan for reducing CO2 emissions. And that's a requirement for investment in our sustainable Euro credit strategy. We have, however, asked the company to integrate these ESG targets into their long-term

[05:36–05:56] incentive plan to make sure that they're fully aligned. And I'm pleased to say that the company has been very receptive to our request. 

Daniel: Super. Thank you, guys. And for those companies who really do have some deeply ingrained ESG issues, why not divest? 

Lizelle: Good question, Daniel. We believe that if we divest, we are unable to

[05:57–06:09] have positive impact. So divestment is certainly not unheard of, but we are active investors and we do take several measures before deciding to do so. When engaging with companies, we raise the

[06:09–06:22] issue and then we consider whether a company is willing and able to improve. If a company acknowledges the issue, that is the first step and we are able to continue our engagement and put forward certain demands.

[06:23–06:39] Daniel: How do you see the results of your engagement beyond a company simply saying that they will look into the issue? 

Lizelle: We certainly are result focused and to facilitate this we have a milestone based approach to engagement and we monitor the progress of these companies through the milestones.

[06:40–06:56] When we raise an issue the engagement is in milestone one. When a company acknowledges the issue we move it to milestone two. But we only move it to milestone two if the company is acknowledging the issue and we are confident that the engagement has a reasonable chance of success.

[06:57–07:16] For example, Heidelberg Cement, referred to earlier, have confirmed that they are now linking these sustainability targets with a long-term incentive plan. This warranted a move to milestone two. When Heidelberg Cement starts to implement the program, we will move them to milestone three. And once it's finalized, we will move it to

[07:17–07:33] milestone four. 

Danny: And maybe a good example also, Lisa, is that we booked good engagement results with companies, for instance, in the European oil and gas sector. So the European oil and gas majors, for instance, BP and Shell, when we started engagement a few years ago, they didn't take

[07:33–07:52] into account, for instance, scope three, which includes the products and services they sell to end clients. And they also didn't have net zero commitments. So based on our engagements and based on the progress in that respect, if you look at it

[07:52–08:08] now, they include scope three, which is really the main element in their whole greenhouse gas emissions. But also they included net zero commitments by 2050 or earlier, they have a decarbonization plan and also a more credible CapEx plan.

[08:08–08:22] Of course, they still need to take steps, but you can really see that engagement is driving the needle. And also that partnering up with those companies and other investors can really move the needle

[08:22–08:36] towards real world change. 

Daniel: Fantastic, Danny. And thank you both. I think it's clear you've built an effective and robust engagement framework. And with that, we've come to the end of this podcast. Thanks again, Lizelle and Danny, and we wish you a nice rest of your day.