Fixed-income investors have increasingly incorporated ESG analysis into their investment processes, and many of us are now trying to determine our role in regard to engagement with public corporate bond issuers.

As a signatory to the U.N.-supported Principles for Responsible Investment (PRI), William Blair commits to the PRI’s six principles. It is the second and third of these principles—“We will be active owners and incorporate ESG issues into our ownership policies and practices” and “We will seek appropriate disclosure on ESG issues by the entities in which we invest”—that most relate to investor engagement.

PRI’s Six Principles

  1. We will incorporate ESG issues into investment analysis and decision-making processes.
  2. We will be active owners and incorporate ESG issues into our ownership policies and practices.
  3. We will seek appropriate disclosure on ESG issues by the entities in which we invest.
  4. We will promote acceptance and implementation of the Principles within the investment industry.
  5. We will work together to enhance our effectiveness in implementing the Principles.
  6. We will each report on our activities and progress towards implementing the Principles.

 

Meaningful Engagement

When most investors consider being actively engaged with companies, they think of it in terms of being an equity shareholder in that company. But acknowledging the responsibility of voting proxies, which accompanies share ownership, we believe public fixed-income investors can also engage meaningfully with companies as stewards in sustainability-focused investing strategies.

In the public bond market, most investors do not have enough influence with issuers to be able to direct specific environmental, social, and governance (ESG) covenants and/or requirements.

Because of this, we believe that engagement is most impactful when investors communicate their preferences to issuers and focus on long-term behavior.

As fixed-income investors, focusing on long-term behavior is consistent with our underlying investment process, which involves seeking to identify companies with strong management teams that are leaders in their respective industries.

Most companies we engage with are amenable to the conversation and eager for feedback.

Our focus has been primarily on smaller-capitalization companies and companies domiciled in emerging or developing markets. That is because many larger U.S. companies have well-documented sustainability-focused initiatives and continue to devote significant resources to ESG issues and reporting, so ample information is available. We find significant value in engagement with companies that do not have such resources or as much publicly available information.

Beginning the Conversation

In our initial conversations with management, our goal is to confirm our understanding of the company’s ESG efforts and reconcile information from independent sources with management’s stated approach and expectations.

Specifically, we try to identify how much ESG is ingrained in the company’s culture—i.e., which of the environmental and social factors are material for the company’s business and how they are being managed.

As we gain an understanding of the company’s fundamentals and become more comfortable with its business, we seek to confirm our understanding of the company’s overall financing needs, sources and uses of cash flow, and long-term capital expenditure plans.

While there may not be a lower cost of capital to a green bond issuer, there also does not appear to be a premium paid by green bond issuers.

This understanding allows us to identify the timing and type of bond issuance management intends. Here we try to identify the appropriateness of green bond issuance for the company.

Green Bond Issuance

As green bond issuance becomes more prevalent among corporations, we have seen a few instances in which a company issues both a green bond and a comparable traditional bond.

Thus far there hasn’t been a persistent difference in valuation for the green bond. While there may not be a lower cost of capital to a green bond issuer, there also does not appear to be a premium paid by green bond issuers. We believe that this serves both the investor and the issuer well.

While some companies may only be interested in a more restrictive issuance (green bond) if it affords a lower cost of capital, it is possible that green bond issuance, because of its dedicated investor base, has more stable spread performance.

This means that if a company has a sustainable business, it may have access to an additional and possibly more stable source of funds.

Green Bond Examples

Starbucks was one of the first U.S. corporations to issue a “sustainable” bond in 2016. Proceeds were dedicated to Starbucks’ supply chain and financing projects in sustainable farming.

Since this inaugural sustainable bond issue, Starbucks has issued bonds for both general corporate purposes and another sustainable bond.

When comparing both structures, adjusting for differences in maturity, we find no evidence of a performance bias in either direction.

More recently, Verizon Communications issued a green bond. Proceeds were intended to be used to fund eligible green investments, including renewable energy and energy-efficiency projects (such as the deployment of 5G wireless technologies, which will allow for real-time response to energy demand and smart city systems).

As with Starbucks, we find no systematic pricing difference between the green bond and bonds issued for general corporate purposes.

We have seen specific trading days, however, where headlines move the spread of the general corporate bond more than that of the green bond. This is likely because green bond investors are dedicated holders and less likely to flip bonds.

Of course, these are examples of large high-grade corporate bond issuers issuing bonds into a stable investor market—so when we engage with potential issuers, we note the nuances of corporate bond pricing and point out the growth of green/sustainable bond issuance and the demand for such issuance.

If a company is a leader in sustainable practices, over time it should see incremental benefits via reduced costs and improved margin, or some other competitive advantage that results in stronger financial performance and/or improved cash flow.

Beyond Green Bonds

Beyond a company’s access to capital and bond issuance expectations, we seek to reconcile the long-term benefits of sustainable themes to a company’s bottom line.

If a company is a leader in sustainable practices, over time it should see incremental benefits via reduced costs and improved margin, or some other competitive advantage that results in stronger financial performance and/or improved cash flow.

Because fixed-income investors favor companies with these characteristics, those companies could be rewarded with incremental depth in their capital markets. This would presumably result in a lower cost of capital.

We find that management teams today are eager to discuss sustainable themes with fixed-income investors. Our goal is to identify companies that are leaders in their industries and have sustainable processes that materially impact their operations.

Some examples of our engagement include:

  • We have engaged with a packaged consumer goods company that is converting to clean energy for all of its operations and to natural-gas-fueled delivery vehicles.
  • We have engaged with a commodity producer that uses sustainable practices for forestry and waste management.
  • We have engaged with a specialty industrial products company that produces infrastructure products for water conservation and management.
  • We have engaged with a water utility company looking to broaden its investor base.

While we cannot claim to have specifically influenced these companies’ corporate strategies, we believe our feedback has been well received and shared within the company.

As a result of our engagements, we have also been able to gain valuable insight into companies’ operations—insight that is significantly greater than what can be gleaned from published information or independent rating services.

As an active manager, we believe that this is a core element of our value proposition.

Todd Kurisu, CFA, is a portfolio manager on William Blair’s Fixed Income team.

References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. William Blair may or may not own the securities referenced, and if such securities are owned, no representation is being made that they will continue to be held. It should not be assumed that any investment in the securities referenced was or will be profitable. 

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Please carefully consider the Funds’ investment objective, risks, charges, and expenses before investing. This and other information is contained in the Funds’ prospectus and summary prospectus, which you may obtain by calling +1 800 742 7272. Read the prospectus and summary prospectus carefully before investing. Investing includes the risk of loss.

Any statements or opinions expressed are those of the author as of the date of publication, are subject to change without notice as economic and markets conditions dictate, and may not reflect the opinions of other investment teams within William Blair Investment Management, LLC or the Investment Management Division of William Blair & Company, L.L.C.

This content is for informational and educational purposes only and not intended as investment advice or a recommendation to buy or sell any security. Investment advice and recommendations can be provided only after careful consideration of an investor’s objectives, guidelines, and restrictions.

Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Investments are subject to market risk. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Statements concerning financial market trends are based on current market conditions, which will fluctuate.

William Blair does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax questions and concerns.

Distributed by William Blair & Company, L.L.C., member FINRA/SIPC.

Copyright © 2019 William Blair & Company, L.L.C. "William Blair” is a registered trademark of William Blair & Company, L.L.C. No part of this material may be reproduced in any form, or referred to in any other publication, without express written consent.

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Please carefully consider the Funds’ investment objective, risks, charges, and expenses before investing. This and other information is contained in the Funds’ prospectus and summary prospectus, which you may obtain by calling +1 800 742 7272. Read the prospectus and summary prospectus carefully before investing. Investing includes the risk of loss.

Any statements or opinions expressed are those of the author as of the date of publication, are subject to change without notice as economic and markets conditions dictate, and may not reflect the opinions of other investment teams within William Blair Investment Management, LLC or the Investment Management Division of William Blair & Company, L.L.C.

This content is for informational and educational purposes only and not intended as investment advice or a recommendation to buy or sell any security. Investment advice and recommendations can be provided only after careful consideration of an investor’s objectives, guidelines, and restrictions.

Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Investments are subject to market risk. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Statements concerning financial market trends are based on current market conditions, which will fluctuate.

William Blair does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax questions and concerns.

Distributed by William Blair & Company, L.L.C., member FINRA/SIPC.

Copyright © 2019 William Blair & Company, L.L.C. "William Blair” is a registered trademark of William Blair & Company, L.L.C. No part of this material may be reproduced in any form, or referred to in any other publication, without express written consent.

Statement of Financial Condition | NMS Rule 605 & 606 | Business Continuity Plan | UK Stewardship Code
Cookie Policy | Social Media Disclaimer | Privacy & Security | FINRA’s BrokerCheck

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