Brunel’s Helen Price on green gilts, climate change and ESG engagement for bonds

25 Jan 2021

Helen Price, Brunel Pension Partnership’s lead on stewardship, engagement and voting, speaks to Mona Dohle about the drive for action not words on corporate climate pledges, green gilts and why the local government pension scheme pool’s influence has spread to bond issuers.

Brunel Pension Partnership favors engagement over divestment, so what campaigns have you led in the past year?

We work with our clients and managers to outline our engagement priorities. They are focused on several themes, climate change being one of them. We also look at diversity and inclusion, human capital, costs, tax transparency and supply chain management.

To give you some examples, we worked closely with the Diversity Project and participated in several work streams. One of those looked at the barriers to diversity in asset management.

Another example is our focus on banks. We co-filed the first climate resolution at a major European bank in 2019 and then continued to engage with the bank on the issue, including at their AGM last year.

Was that at Barclays?

Yes. Our aim is for the bank to establish short, medium and long-term targets to back up their ambition to be net zero by 2050. That has been a great piece of work and something we will be continuing this year.

Another area that we looked at last year is the impact of Covid. We supported an engagement on mental health, led by fund manager CCLA. As part of that, we sent a letter to all FTSE100 companies to help them better understand their approach to workforce mental health. We want all FTSE100 companies to bring in a mental health plan for their employees, which might include things like line manager training, flexible working and being flexible with performance reviews as well as looking at how clearly they communicate to their employees what provisions are available. That initiative was supported by $2.2trn (£1.6trn) of assets under management and we had some good responses from the companies.

Another area we have focused on is working with the big four auditors to better integrate the financial materiality of ESG risks into company accounts. We have also – working with the Institutional Group on Climate Change and Sarasin & Partners [an investment manager] – engaged with energy companies on how they can better reflect climate risks in their accounting.

Is it more difficult to convince companies of the importance of ESG now that their profits are under pressure from the pandemic?

The pandemic has been a challenging time. But, from our perspective, it does not mean the ESG risks faced by the companies will go away. Obviously, there is a need to focus on short-term risks, but companies increasingly need to look long-term. If anything, the pandemic has highlighted the need to act, to move away from regarding ESG as a non-financial extra. This could be a precursor of things to come if we do not deal with existential risks, such as climate change.

Throughout the past year, we have witnessed social disruption to many peoples’ lives and they will be reflecting on that in their needs going forward. We have also seen the tragic death of George Floyd which has put into the spotlight existing inequalities and we have seen the Black Lives Matter movement sweep across the globe.

There is now a new sense of urgency. Companies are understanding the need to be more sustainable, that this is what their customers want. In fact, early indications show that sustainable companies are faring better during the pandemic.  

Companies are also aware that there will soon be a large wealth transfer from older generations to millennials. Research shows that this generation has a greater interest in ESG. So, this wealth transfer is likely to fuel a growing demand for more sustainable products and there will be more requirements on companies to meet those needs.

We also saw major ESG announcements from companies throughout 2020, despite what they are facing. Johnson & Johnson, for example, has committed $800m (£589m) to make their products more sustainable. BP recently announced a 10-year plan which includes a 10-fold increase in low-carbon investments.

For us, the biggest challenge will not be whether companies will pull back on ESG or not, it will be distilling the genuine commitments from the PR exercise. We continue to see more announcements and commitments from companies, but the big question going forward will be whether they follow up on this in the years to come.

Coming back to Barclays, they did not adopt the shareholder resolution that you and your peers put forward, setting their own proposal instead.

That was interesting. We have not seen that before. We secured more than 24% of the vote, which means Barclays needed to respond. We will continue to engage with them following their announced short and medium-term targets.

So, pressuring them to put forward their own climate policies has been a step forward?

Absolutely. It is unprecedented and we are pleased with the outcome. We have subsequently seen more net zero announcements coming from the banking industry. It will be important to follow the progress in that area of the financial industry. It is an area that investors are increasingly becoming more aware of as an important sector to engage on.

As you indicated earlier, the challenge will be deciding if this is a sincere commitment or not. Have they put in place a roadmap of how to get there?

These announcements are fantastic, but we need to see short and medium-term targets as well as the structural changes they are going to put in place. You cannot wait until 2040 to start doing the work.  

Speaking of climate change, how have the updated reporting standards in the Statement of Investment Principles affected your work?

Generally, it has not had a huge impact as it is very much business as usual. We are already supporting our partner funds and we have regular meetings and sub-groups to keep one another updated on progress. The climate change policy we released in January last year is a great example of these high standards and our framework, for which we have won an ESG Initiative of the Year award.

As part of that, we run regular workshops with our partner funds where we have engagement conversations to seek their views. They are very much part of the process and we could not have delivered this policy without their input.

Are there differences in how partner funds approach engagement or is Brunel streamlining the process?

Brunel takes a unified approach to engagement by seeking the endorsement of our partner funds in enacting the policy.

A common criticism of engagement is that while shareholder rebellions are rising, most shareholders tend to vote with the board.

This was hotly debated last year when the Securities & Exchange Commission put forward its proposals on shareholder requirements.

From our perspective, while shareholder proposals rarely gain a majority, we have seen that they do have an impact.

As mentioned earlier, in the UK shareholder proposals that secure more than 20% of the vote the company must explain what action they will take and report on the outcome of their engagement with shareholders. This helps raise awareness of topics other investors might not be aware off.

I had an interesting discussion with one of our asset managers about voting policies. BlackRock has analyzed the percentage of support for shareholder resolutions and the action taken by companies in the subsequent 12 months. It provides some interesting insights into the 20% threshold and the reaction that comes on the back of it.

Coming back to Barclays, without the proposal of the shareholder resolution, I do not know whether we would have seen a net zero announcement from the bank or not. I know that is not reflected in our shareholder resolution only just getting 24% of the vote, but when you look at the company’s net zero ambition getting nearly 100% support, that in our view is the direct impact of shareholder engagement. You cannot always measure impact by the percentage of people that have voted for shareholder resolutions.

It can take time for shareholders to become aware of an issue and to support it. Take diversity, for example. Proposals on diversity put forward in the 1990s were rarely getting 6% of the vote, so it took a while for shareholders to understand the importance of the issue and to address the best way of voting on it. Nowadays it is covered in most investor policies and shareholders are regularly voting against boards for having poor diversity and are setting clear expectations for the future. For example, from 2022 LGIM will vote against S&P500 and FTSE100 companies if they do not have a person of colour on their board, which is progress considering the 6% of votes we saw in the 1990s.

So, shareholder resolutions are a useful tool for engaging with companies and we will see an increase of proposals in the coming years.

Unfortunately, we still hear from companies that say we are the only one that is concerned about an issue. So, shareholder proposals are sometimes required as an escalation process and to raise awareness among other shareholders.

What are the lessons to be drawn from Boohoo? A lot of UK schemes held positions in the clothing retailer, even some ESG funds. The argument was that they were engaging with the company on its labour standards. Is this an example of the limitations of shareholder engagement?

Hindsight is a wonderful thing. This is not the first example and will not be the last. We have seen this before with the Volkswagen emissions scandal and Tesco’s tax practices. It is always going to be a challenge to know when to draw the line and assess the degree of genuine commitment to improvement by a company.

Unfortunately, it is often not until a scandal is reported that you get to see the company’s genuine response.

Supply chain issues are not new and we have seen them in many areas. It is challenging, especially when they are global and third parties are involved. What we would say is that during the past year the focus on human capital management has been elevated. Our engagement with companies and our expectations of them will increase over time.

To come back to the point of ESG funds investing in Boohoo. It is important that ESG funds are differentiated from sustainable funds. I would not expect to see a fast fashion company in a sustainable portfolio. An ESG fund would look more at relative scores and screening whereas a sustainable fund is more focused on the future impact and delivering the sustainable development goals.

Another point this scandal highlights is the scarcity of workforce social data. That is part of the reason why we are working with the workforce disclosure initiative which seeks better disclosure from companies.

You often work with other institutional investors on engagement to increase the pressure on firms. Could you give us some recent examples of successful collaborations?

An example last year was the investor mining sector initiative led by the Church of England and the Swedish National Pension Funds. Brunel attended all the workshops and meetings and was part of the collaborative engagement. Within a year, this led to the establishment of a global database of standards on mining and tailing facilities which have since been adopted by mining companies. The progress we made within 12 months was phenomenal and could not have been achieved by a lone investor.

Are you applying your ESG standards outside of equities?

We do not hold our partner funds’ fixed income assets yet. But we do engage whenever possible. Last summer, our chair, as part of a coalition of £10trn worth of assets led by the Impact Investment Institute, signed a letter to the government to make the case for issuing green gilts. We were pleased to see that this letter led to the UK government announcing plans in November to issue its first green bonds.

That will be the first in a series of new issuances which will help to fund projects to tackle climate change, provide much needed infrastructure investments and create green jobs across the country. We have engaged on this at policy level and will be reviewing ESG standards when we come to our fixed income portfolio, which should be pooled this year.

Where do you see opportunities to increase investor involvement around responsible investing in fixed income?

The timing of engagement is key here, particularly prior to the issuance. Our belief is that well governed companies are more likely to make their loan repayments and improve their credit worthiness.

We have seen some interesting developments. Besides green bonds, we are now seeing blue bonds and companies that are integrating ESG into covenants. For example, the interest repayments are linked to the delivery of the issuer’s sustainability targets. If the company fails to reach their targets, they pay more money to their bondholders.  

Compared to the divestment versus engagement case for equities, bonds are a primary source of debt for companies whereas equities are often traded in the secondary market. So, selling a share does not have as direct an impact on the company as refusing to buy their bond does. If investors refuse to buy corporate bonds based on the company’s sustainability credentials, that potentially creates a huge problem. People are increasingly starting to see the difference in importance between the primary and secondary markets. The Transition Pathway Initiative is doing some interesting work in this space. It is looking to develop a framework for assessing corporate fixed income issuers and we hope that will lead to greater engagement with these companies. As investors, we could have a big impact here.

What are the big topics you will be working on this year?

Climate change will, of course, be a continued area of focus for us, particularly in the lead-up to COP 26. We will also continue our work with banks. We will be looking under the bonnet, in particular working with the institutional investor group on climate change, establishing a bank working stream to look at these commitments and developing better standards. We will also be reviewing the upcoming AGM season proposals and continuing our work on diversity. We are working with asset owners reviewing how we review and monitor asset manager diversity and aim to collectively publish updates later this year. We are also looking to expand the understanding of diversity from beyond just focusing on gender to also include race.

The pandemic has also highlighted the importance of human capital management, so we will continue to work with the Workforce Disclosure Initiative to seek better disclosure of social elements within companies. We are also collaborating with them on the Good Work Coalition, which will engage with companies on precarious work, the living wage and the living hours. That will be an important area of focus for us this year.

Following the 2008 financial crisis, we saw an increase in precarious work, so it is important that we try and engage on this in the new year.

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