Case studies: Insight’s engagements with issuers | Insight Investment

Background: Insight previously engaged with the issuer on a variety of engagement and environmental issues, most recently on its supply chain and factories in China, specifically the operation of a plant in Xinjiang and forced labour allegations. The allegations mean the issuer’s impact bond issuance has the lowest possible controversy score from MSCI, leading to an automatic red rating under Insight’s impact bond assessment framework.

Engagement approach: In Q3 2023, we took the opportunity to engage with the issuer as it planned to issue a green bond. The company’s controversy score required an automatic downgrade of its rating under Insight’s the framework, but we wanted to understand progress in addressing the controversy. We also had some concerns about some of the company’s decarbonisation targets.
The issuer provided an update on the Xinjiang plant, confirming it plans to have an external audit, which is scheduled to happen before the end of 2023. The issuer emphasised it understands only an independent audit is acceptable and was keen to emphasise that it has not been accused of any wrongdoing. The issuer confirmed once it has an update on the situation it will communicate to investors as soon as possible, and also stated it is in contact with MSCI regarding developments and hopes MSCI will remove its controversy flag. We communicated during the engagement that the controversy precludes the issuer’s bonds from inclusion in Insight’s sustainability-focused Responsible Horizons strategies.
On decarbonisation, we asked the issuer why its goal is to achieve carbon neutrality by 2050, rather than net zero. The issuer stated its new chief sustainability officer started earlier this year and is assessing if a carbon net-zero target is more appropriate. We recommended the issuer enact a net-zero target, given it is aligned to a 1.5ºC scenario.

Outcome: We were disappointed with the issuer’s responses. It was concerning that almost a year on from the controversy leading to a downgrade by MSCI, the external audit of the plant had not occurred; and that transitioning to a net-zero goal appears dependent on the view of the new chief sustainability officer.
We communicated that the issuer’s green bonds will retain a red rating according to Insight’s impact bond assessment framework, meaning they remain ineligible for our Responsible Horizons strategies until the resolution of the issues surrounding the Xinjiang plant. The controversy regarding the plant also means that Insight’s strategies aligned with SFDR Article 8 and Article 9 are unable hold the conventional bonds of the issuer.
We will continue to monitor and engage with the issuer on the matter.

Background: We have previously engaged with the bank on several occasions as part of our counterparty engagement programme. Our net-zero alignment framework flagged that MSCI assessed the issuer’s reporting as insufficient under the disclosure pillar, particularly in relation to Scope 2 emissions. On closer inspection, it was found that the issuer’s reporting is not aligned with the Greenhouse Gas (GHG) Protocol as the issuer only reports market-based emissions and does not report location-based emissions using country-specific grid factors, despite such disclosures being a key part of company-specific carbon reporting.

Engagement: In Q3 2023, we engaged with the company to strengthen the issuer’s carbon reporting to report both location and market-based emissions and ensure compliance with the GHG Protocol going forward.
Its representatives recognised the need to provide clearer carbon reporting data to include location-based emissions. The issuer confirmed it will provide location-based emissions in the relevant data table in the next reporting year.

Outcome: The issuer is relatively strong in terms of its environment policies, meaning that its ‘Committed’ rating under our net-zero alignment framework does not reflect our overall opinion of the bank. The promised improvement in its reporting should increase its rating to ‘Aligning’ under our framework. The bank is using our framework to understand the weaknesses in its carbon reporting.
We plan to re-engage with the issuer to understand how it is performing relative to the other counterparties in our engagement programme.

Background: Insight is participating in a sovereign collaborative engagement programme. The sovereign issuer was selected on the basis of high transition risk, deep and liquid domestic capital markets and renewed climate policy momentum.

Engagement: In Q3 2023, we engaged with the issuer’s Treasury to discuss its intention to develop a green bond framework and planned issuance of its inaugural green bond in mid-2024; and wider plans regarding climate policy implementation and climate finance.
Three broad themes the programme seeks to address are climate mitigation, resilience and biodiversity restoration. On climate mitigation, if the new bond’s use-of-proceeds allows for financing fossil fuel and/or generation ‘transition’ projects, we highlighted that this should align with the ICMA Transition Finance Handbook or Climate Bonds Initiative (CBI) Principles for Transition. We also recommended alignment with the CBI Climate Bonds Taxonomy, in the absence of the issuer’s final sustainable finance taxonomy.
The issuer’s representatives flagged that it could be challenging to prioritise a single, large bond issuance that is at least in line with the typical size of recent 10 year Australian Government Bond issuance, which the engagement group believes would help manage liquidity challenges in the green bond market. Additionally, the issuer’s representatives indicated that this issuance programme is likely to remain a relatively small share of the issuer’s upcoming debt issuance.
The issuer is exploring the inclusion of critical minerals development and processing, which would lead to trade-offs between the contribution of these activities to the issuer’s domestic emissions relative to their potential contribution to international low-carbon value chains. This also raises potential concerns that some of these minerals could be used for defence applications, risking exclusion from some funds with sustainability criteria. Insight said we would expect to see clear delineation of any minerals projects on the basis of end-use (e.g., green versus defence versus other applications).
Along with other engagement group members, we recommended the issue’s use-of-proceeds should be linked to the issuer’s revised net-zero strategy, nationally determined contributions, 2035 emissions target and sectoral emissions pathways, with a focus on managing systemic risks to the country’s economy and capitalise on emerging opportunities in the low-carbon value chain.

Outcome: Insight will meet with the issuer’s representatives one-to-one to discuss the structure of the green bond and linkages to wider debt issuance plans.
Detailed analysis of green bonds issued will be pivotal given the apparent lack of buy-in from the sovereign issuer’s issuing body, with its history of opposing green bond issuance and the expectation that the programme will remain a small share of overall refinancing; and the ultimate end use of the  bond’s proceeds, potentially in high-impact sectors.

Background: The company is one of the top global manufacturers of medical equipment, particularly reconstructive implants that are utilised in orthopaedic and spinal reconstructive surgeries.

Insight engaged with the company due to its poor Prime corporate ESG rating, which is primarily due to weak scores on product safety and quality, and our engagement sought to improve related disclosures. We also discussed other issues including labour management practices.

Engagement: In Q2 2023, we engaged with the company. On product quality and safety, the company recognised performance had been weak in the past; it issuer has taken several steps to overhaul product quality and safety issues. The company revealed it managed to resolve the issues outlined in two of three previous warning letters, changing the leadership of the product quality team and investing substantial resources into analytics and governance. The company publishes details of its product recalls in its sustainability reports, and has a target that places it among the best-in-class of its peer group.

In addition, the company revealed it has implemented a modifier in compensation packages for all employees that impacts the calculation of awards depending on how the company performs on product quality, and the company has made this more stringent this year. The modifier accounts for quality and other ESG measures in individual components, and its impact on an employee’s remuneration depends on the employee’s role. The company said it is evaluating whether it should add more factors into these calculations.

Outcome: The company acknowledged poor historical performance on product quality and safety. Recently, its recall numbers are improving, and recalls and warning letters have reduced in number. However, we encouraged it to issue additional quantitative disclosures, and recommended that the company increase its disclosures around employee engagement programmes. We will continue to monitor its ESG performance.

Background: Insight engaged with the company as it accounts for a large proportion of Insight’s financed emissions, which we are assessing as part of our net-zero commitment. The company has also been the subject of social controversies potentially affecting its supply chain; similar issues had driven the recent downgrade of a competitor’s Prime ESG rating, leading the competitor’s exclusion from some Insight portfolios with related exclusion parameters. [Progress to date – number of meetings, when we started engagement and topics discussed]

Engagement: In Q2 2023, we engaged with the company to discuss its emissions. The company has an ambitious plan to make its entire fleet of new vehicles net carbon neutral over a vehicle’s life cycle before 2040, and to electrify its fleet, among other initiatives. We highlighted the need for more ambitious carbon-reduction targets, and discussed its use of scenario analysis, including whether this had affected any business decisions.

Outcome: The company’s low-carbon transition plan is ambitious with robust targets, but its TCFD reporting remains limited, with scenario analysis yet to be converted into financial impacts. In a similar vein, while the company’s ESG reports are lengthy, they lack clear key performance indicators to demonstrate progress across aspects of its strategy beyond greenhouse gas emissions targets. We recommended it improve these disclosures.

Labour issues in its supply chain require close monitoring. We encouraged the company to provide clearer disclosures of supply-chain risk in high-risk regions.

Background: The company is a long-term investor, manager and developer of warehouse properties in Europe. We initiated this engagement because we want to understand the issuer’s ESG development on three main areas: its current plans for carbon emission Scope 1-3 reductions, engagements with external ESG ratings, and renewal of the Building Research Establishment Environmental Assessment Method (BREEAM) building certification.

Engagement: We engaged with the company in Q2 2023. On carbon-emission reductions, we expressed our preference for a net-zero target with intermediate steps for carbon-emission reductions across Scope 1, 2 and 3 emissions and science-based targets. The issuer stated that it is still looking to progress its analysis of in-house emissions and targets this year, and added that its competitors may have published targets that they will ultimately find impossible to meet. It is hesitant about setting a net-zero target now and would prefer to gain more experience and formulate an achievable plan for its carbon-reduction. We emphasised that if the company continues without a target investors may not differentiate the company from other companies who have no intention of achieving net-zero at all. With regard to external ESG ratings, the issuer is not covered by ratings agencies so we rely on a survey to generate the company’s ESG score. We reemphasised to the issuer that external ESG ratings would be beneficial as they help to provide more data on the company and provide a clearer comparison with its peers.

Finally, we discussed its BREEAM in-use building certificates, which are due to expire next year; the newest BREEAM criteria mean there is a need to comply with tougher demands to maintain the current ratings. The issuer said it is fully committed to spending capital to ensure its buildings comply with the higher thresholds and stated it will assess the new requirements thoroughly.

Outcome: The issuer acknowledged the time pressure it faces to set out a net-zero target, and that it appreciated the need for external ESG ratings. We will monitor its progress against our recommendations and re-engage when there are new developments.

Background: Our engagement with the company was initiated as part of a deep-dive exercise into stranded asset risk in European gas distribution companies. While the company is not involved in gas generation, it is fully exposed to the gas value chain and is therefore entering a transitional phase facing relatively uncertain long-term prospects. The company, like other gas distributors with which we have engaged as part of this exercise, sees itself as playing a fundamental role as a facilitator towards a low-carbon economy due to the repurposing of its networks for green gases. However, it is still in the early stages whether you are considering the company and government policy perspectives.

Engagement: In Q1 2023, Insight engaged with the company to support detailed analysis of the wider sector and the transition to a low-carbon economy, by discussing topics such as hydrogen, stranded asset risk, capital requirements and regulations. Areas we identified for improvement included the need for further detail on its strategy for future scenario analysis and a shift of focus to the physical results of hydrogen targets rather than technical certifications.

Outcome: We conducted similar stranded asset risk deep dive exercises on other European gas distribution companies to conduct a benchmarking exercise. We remain comfortable on the credit profile of the issuer in the short/medium term, given gas will remain a major source of European energy, but believe uncertainty exists about the transition away from gas, so remain cautious of investing in longer-term maturities.

Background: The engagement was driven by our decision to consider the company as a potential impact issuer, meaning it has a significant portion of its revenue linked to activities deemed to have a positive environmental and/or social impact and that demonstrate no material misalignment with the UN Sustainable Development Goals. This is driven by its focus on corn-based bioenergy production. The company operates in a biodiversity-sensitive area, and its green bond framework lacks important details, leading us to rate its green issuance as red – meaning it is ineligible for investment in our Responsible Horizons strategies. However, the company has a Prime corporate ESG rating of 2 (where 1 is the best possible rating, and 5 the worst possible rating).

Engagement: The company expressed interest in aligning with the EU taxonomy. We encouraged it to disclose more detail on how its business activities align with the taxonomy’s technical screening criteria, ‘do no significant harm’ principles and minimum social safeguards. In particular, regarding the technical screening criteria, we suggested providing information on the carbon intensity of biofuel the company produces. We understand that it can be challenging for companies operating outside Europe to fully comply with the EU taxonomy, but we would view transparency on the work to assess alignment favourably.

Regarding its green bond issuance, to improve transparency and illustrate strong oversight, we recommended providing additional detail on a wide range of items, including how projects are robustly and independently evaluated, selected, and monitored, including any exclusions or management of ESG risks throughout the process; any minimum levels/thresholds for use-of-proceeds categories and whether they are aligned with any official or market-based taxonomies; the expected split between refinancing and financing, and operational expenditure or capital expenditure, where we encourage focus on new financing projects; clarification on how proceeds are managed internally, including any verification by an external third party to attest to the robustness of the internal tracking quality; and how much of the company’s economic activities are eligible under the impact bond framework.

Outcome: Our discussion clarified that the company has a strong sustainability risk assessment and management framework related to raw material sourcing, food security and land use. However, several important policy documents are only available in its local language, and we recommended it publish sustainability-related policies in English to allow investors, to more easily assess performance. We have retained the red rating on the company’s green bond, pending its implementation of the improvements we suggested.

Background: The company is privately owned. At the time of our engagement, its Prime corporate ESG rating was the worst possible at 5 (with 1 being the best possible rating), weighed down by its social and governance scores (each 5).

Engagement: The objective of the engagement was to discuss the company’s low Prime corporate ESG rating and to improve its ESG-related disclosures, particularly in relation to social and governance factors. The company has had major social controversies, and we sought to understand how the company is addressing these to minimise the risk of reoccurrence.

As a private company, it discloses less than peers of a similar size. The company recognises this and stated it is looking to disclose more; for example, it has strengthened reporting of its Scope 1, 2 and 3 carbon emissions, and the company now submits climate, water and forestry questionnaires to CDP. However, the company’s social and governance disclosures are weak. For example, it is reluctant to share information on its senior leadership team, particularly the board, given it is a family-run company and wishes to retain the privacy of its board members. We explained that, due to the size of the organisation, we except it to provide disclosures to a similar level as its public peers.

We also discussed upcoming Corporate Sustainability Reporting Directive regulations which apply to the company. It highlighted it will disclose more in upcoming reports to ensure alignment with investor expectations and changing regulations. However, it was not clear whether it will publish more detail on board composition.

It is not clear how suppliers’ social performance is tracked at the group level. According to MSCI, only some top-level suppliers have been audited. We explained to the company that it should report this percentage, targeting 100% over time, and details of corrective actions should be provided. This would provide stakeholders with increased confidence that social supply chain risks are being appropriately managed.

We also recommended to the company that its sustainability report should focus on metrics and include year-on-year trends and explanations of movements in performance, rather than its current approach to ESG reporting, which is very qualitative in nature.

Outcome: Having provided our input to the company and the banking syndicate, we will monitor the company’s disclosures for improvements and will re-engage after any updates.

Background: The issuer is a multinational energy company. It is primarily a petroleum company but has also made investments in renewables.

Insight’s engagement: As part of a general update with the issuer we covered two ESG topics: its carbons emissions, and its product footprint and guidance for its 2023 energy production mix.

Additionally, we previously engaged with the issuer after it exceeded a 5% threshold measuring the proportion of its revenues generated from unconventional methods such as Arctic oil. Breaching this threshold meant it failed the purchase agreement for one of our key portfolios. At our previous engagement, the company stated that some of the oilfields labelled as ‘unconventional’ should not qualify for that description given the area in which three of the oilfields are located are ice-free most of the year. Excluding the three oilfields pushes the issuer’s controversial revenues score below the threshold; however, given the heightened biodiversity risk in the Arctic, we decided to retain the definition of these oilfields as ‘unconventional’.

At our most recent engagement, the company confirmed it views itself as aligned with a 1.5 degree global warming scenario. It also confirmed it has only one Paris-aligned target. In addition, we asked about its group-wide emissions reduction targets, and it confirmed it has a 50% group-wide emission reduction target by 2030 for Scope 1 and 2 emissions, but does not have targets for Scope 3 emissions, which it deems out of its control. We explained that we expect oil and gas companies to set Scope 3 targets, in line with many of the issuer’s peers. 

We also asked about its unconventional oil and gas exposure to obtain an update on our last conversation. The issuer confirmed an Arctic oilfield remains on track for 2024 but it is still too early for volume/production guidance. The issuer also confirmed it won’t rule out more investments in the location, as it views it as conventional. Finally, the company did not reveal its energy-mix plans or any guidance for 2030 or 2050. It did guide that some projects will come on-stream by 2030 but looking for more opportunities that make sense. 

Outcome: We will continue our separate, more specific engagement with the issuer on its plans for those oilfields deemed ‘unconventional’ to assess the environment/bio-diversity impact of these projects. Restrictions remain in place as a result of the company exceeding the 5% threshold.

Background: The issuer is a Swiss multinational commodity trading and mining company. The company violated with the UN Global Compact because of a bribery violation controversy and has fallen afoul of regulators in several jurisdictions.  

Insight’s engagement: Our engagement objectives focused on three areas: understanding the company’s time-bound commitment to stop global investment in new thermal coal capacity; providing additional detail on thermal coal asset run-down plans such as timelines, capacity reductions, and ‘just transition’ considerations; and due to its inclusion in a third party’s UN Global Compact violators list and bribery settlements with various regulators, we wanted the issuer to improve disclosures on corrective actions, proactive measures or quantitative data related to ethics, compliance, and internal controls.  

The company’s previous disclosures indicated its run-down plans are inconsistent with Insight’s position on thermal coal. Management remains committed to maintaining thermal coal assets in the portfolio. The issuer stated it would not make an explicit commitment not to sustain or expand coal capacity. Likewise, it argued while investors in the UK are calling for a radically accelerated decarbonisation pathway, other investor groups want them to buy more coal assets because the company is viewed as the best stewards of the assets.

Regarding the UN Global Compact violation, as part of its settlement agreements, two major government agencies will monitor the company for the next three years. Given the level of scrutiny, it believes investor fears should ease, and does not plan to provide specific metrics/guidance on improvements outside its previously disclosed public statements. The issuer stated it is very different today and the additional monitoring will give public markets the confidence that the new systems will support the business. 

Outcome: Our two direct engagements with the company in 2022 did not provide much evidence that the company is improving on material ESG issues, but the company acknowledged the strategic priority to improve and execute its coal run-down strategy. As a result, we escalated it to our monitoring list due to the UN Global Compact bribery violation controversy and non-compliance with our position on thermal coal. We have communicated our expectations verbally and in written form to management. The company will publish a climate progress report in March 2023, and we intend to follow up to assess progress toward our engagement objectives.

During the company’s recent investor day in Q4 2022, we were pleased that the company announced a commitment to close 12 coal mines by 2035. This was the first time the issuer has disclosed a quantified number of coal-asset closures with specific target dates, which was one of our engagement objectives for the company. While we are still monitoring the company's coal run down strategy closely, we view this as a positive incremental improvement on the transparency of its coal exit strategy.

Background: The issuer is a European multinational automotive company. We engaged three times during Q4, initially on the implemented initiatives following a recent scandal, to understand its decarbonisation strategy, and then on the company’s response to a controversy over allegations of forced labour within its operations.

Insight’s engagement:

Initial engagement on changes implemented following a recent scandal, decarbonisation targets and receive updates on its electric vehicle strategy

• The company provided an update on various issues related to a recent scandal. Overall, the legal process is ongoing, with a subsidiary’s lawsuit and a class action lawsuit ongoing. In the US, the legal consequences are largely finished, but several states continue to push for sanctions. The issuer provided an update on its plan to change its culture following the scandal, with a 10-point strategic plan, and it is attempting to improve its relationship with customers and has set in place several different surveys to gauge opinions on culture in the group. However, senior executives tainted by the scandal remain in post.
• We asked about its internal carbon footprint and the issuer stated it has a 100% renewables target (excluding China) by 2025. Its domestic emissions reduction effort is complicated by the fact that coal remains in use in its domestic market, but overall, coal represents a very small part of the mix. In addition, suppliers are contractually obliged to use green energy production and it had an audit process in its domestic market to measure the energy consumption of its battery technology. The issuer also indicated it has contractually obliged suppliers in China to use green energy.
• Finally, the issuer has committed to electrifying key models across it brands during 2022-2024 and will cease production in Europe of internal combustion engine vehicles for mass-market brands by 2033.

Follow up engagement on forced labour allegations in a Chinese plant

• We attended a investor call with the company’s Human Rights Officer following allegations of forced labour, and we conducted a call with the company’s investor relations team. The company stated that the third-party assessor has confirmed there was no forced labour in any of its operations in China, but the third party reported the allegations made by NGOs that some employees in the contentious plant might have been transferred from vulnerable positions elsewhere in the region.
• The company stated that it is unlikely to cease participation in the plant. They first want to send executives to visit the plant and to elaborate a full update on the situation. The third-party assessor will review its assessment if an independent third-party investigation or compliance monitoring agency has concluded (through onsite inspection or an independent audit) that its concerns have been alleviated.

Outcome: We believe that several areas of improvement are necessary, and we recommend that audits of ethical standards should occur annually, the issuer should appoint a new chairman and introduce a renewable energy target in China.

We sold bonds from the issuer held in our Responsible Horizons strategies. We are continuing to monitor the situation closely and will re-engage on those different topics.

Background: The engagement was part of New Zealand Debt Management’s (NZDM) programme of meeting with significant investors to discuss their issuance programmes, with a particular focus on their green bond programme. The framework was initially rated light green due to due to a lack of detail on the thresholds and goals within the use-of-proceeds categories, and how sustainability and ESG risks associated within the categories would be addressed. Insight sought to gain further clarity on the use of proceeds of the bond through the engagement with NZDM.

Insight’s engagement: NZDM provided a granular breakdown of expenditure and offer details on major projects. NZDM addressed
Insight’s concerns with the framework, including on energy efficiency, green buildings and infrastructure, agricultural emissions, Mâori involvement in project selection, and government budget decisions. The following additional details were provided during the engagement:

• Providing a financing/refinancing split; majority of proceeds funding new projects.
• More insight into the allocation split between the proceed categories.
• Greater detail on the use of proceeds categories, especially for energy efficiency and green buildings.

Outcome: We consequently upgraded the bond framework rating to dark green following satisfactory responses during the engagement as we felt more comfortable that ESG risks are being identified and mitigated within the use of proceeds categories. The engagement was an open two-way discussion where NZDM showed a clear desire to understand and take our views into consideration.

Background: We engaged with Lithuania in 2022 as we wanted to understand the impact that Russia’s invasion of Ukraine has had on the country. We used the engagement to assess Lithuania’s management of heightened geopolitical risk caused by the war.

Insight’s engagement: Lithuania has made faster progress than the rest of the EU in transferring to alternative energy sources and
will likely continue to do so. This helps to reduce dependence on Russian imports of energy; however, we did identify that some reliance on Russian electricity infrastructure will still exist for a few years. Although Lithuania has been impacted economically, financially and politically by the Russian invasion of Ukraine through re-exports, energy production, logistics and the presence of Russian nationals, our engagement gave us confidence that geopolitical risk is being managed effectively in the country.

Outcome: As a result of our engagement, we increased our holding by participating in Lithuania’s subsequent issuance. We plan to continue to engage with the government in 2023 to understand how it is progressing in reducing links with the Russian economy.

Background: The company is a private holding company headquartered in Singapore. As the company is privately owned, disclosure on ESG issues, including climate change, has historically been poor. However, as it owns a large portfolio of companies, it has the potential to have significant influence on its investee companies’ ESG practices. The lack of transparent disclosures meant that we were unsure of climate change was being managed at the company.

Insight’s engagement: We have engaged with the company several times since 2018 to provide feedback and recommendations on
the company’s disclosures and approach to climate change. The company has been receptive to our engagement and has made significant improvements over the course of our engagements. This engagement focused on the issuer’s management of climate risks at portfolio companies. We identified that although the company’s disclosures had improved in recent years, limited detail was still provided on its engagement and monitoring of climate risk with portfolio companies.

Outcome: We have monitored the company’s climate-related reporting and performance closely over the past few years and we have identified several areas of progress, including the appointment of a Chief Sustainability Officer in 2021. The company has also set a net zero by 2050 target with associated decarbonisation pathways, it has begun reporting against the TCFD recommendations and has used the output of scenario analysis to set an internal carbon price. We continue to provide feedback to the issuer. We provided our recommendations to the issuer during the engagement and in writing following the discussion. We will monitor the implementation of these recommendations over time.

Background: We engaged with an IT infrastructure services provider to improve its disclosures, focusing on greenhouse gas emissions reduction targets and human capital metrics such as attrition rates and diversity. We identified the company for engagement due to its poor performance with third-party ratings agencies, which was driven by weak reporting and a lack of transparency.

Insight’s engagement: During our engagement with the company, we explained our concerns and recommendations for improvement. We were pleased that the company understood its shortcomings and was receptive to our feedback. This included providing recommendations to establish short-term greenhouse gas reduction targets.

Outcome: Following the engagement, we monitored the company’s progress and we were pleased to see that it set a number of carbon reduction targets, including a target to achieve net-zero carbon emissions by 2040. We look to continue the conversation in 2023 to understand if the company has implemented any additional recommendations, and to see if the developments have fed through to the company’s scoring with third-party rating agencies.

Background: We engaged with a Mexican beverage company to highlight the governance issues affecting its Prime
corporate ESG rating.

Insight’s engagement: Our engagement primarily focused on highlighting areas for improvement related to the firm’s governance
policies. We sought to explain to the issuer which areas score poorly within our Prime framework and provide detail on specific policies and initiatives which could be implemented to improve performance. Moreover, we wanted to better understand the firms views on these underperforming areas, current mitigants and future plans. Accordingly, the primary focus for improvement we wished to outline related to board independence, board entrenchment, non-executive directors sitting on too many boards, and a lack of female representation on the board. In addition, we suggested we would like to see an improvement in pay disclosure for executives, as well as explicit links to sustainability performance in its current pay policies.

Outcome: The firm was very receptive to comments and our proposed areas for improvements. It highlighted some disconnect between details highlighted by the ESG agencies and actual policy. The company therefore stated that it aims to improve engagement with the ESG agencies to resolve the issues.

The company also stated that it is currently working on board factors as part of its ESG policy update and its subsequent inaugural ESG report, due as soon as the first quarter of 2023, alongside a new responsible investment report. We will re-engage in 2023 to review progress after their new ESG and responsible investment reports. Board improvements are the main focus here and we will be looking to see tangible progress.

Background: We engaged with a Canadian bank on a number of occasions as part of our counterparty engagement programme. We identified several areas of underperformance from the counterparty peer benchmarking exercise, including fossil-fuel financing and the bank’s impact lending framework. We organised follow up calls to provide a summary of performance and to provide our expectations for improvement.

Insight’s engagement: We explained to the counterparty that its fossil-fuel financing policy contains many loopholes and is not in
line with the International Energy Agency’s Net Zero Emissions by 2050 scenario. For example, the policy states that it will not provide financing for new greenfield coal power plants or thermal coal mines, and there is a 60% coal power and mining revenue generation threshold for new clients only. The bank stated that although they get called out for high volumes of fossil fuel financing, their exposure to oil and gas is less than 1% of total loans outstanding, and they are committed to continue to work with existing clients to phase out coal.

Furthermore, the counterparty’s impact bond framework was given a red rating by our impact bond assessment, due to weak use-of-proceeds categories and less transparent disclosures. This was fed back to the bank along with some recommendations to strengthen the framework.

We engaged with the bank on its executive remuneration, as we found that these disclosures were vague and the objectives used were qualitative in nature.

We also discussed the areas of the questionnaire on which the bank scored well, including diversity and inclusion. The counterparty had strong gender diversity targets and performance and is also making significant progress in other areas of diversity, including ethnicity and disability. We found that many of the banks’ peers included in the assessment focused entirely on gender diversity.

Outcome: The bank was receptive to our feedback. Following the engagements, we sent a written feedback report to the counterparty, which stated it is reviewing the recommendations. We were pleased to see in early 2023 that the bank has linked executive compensation to the strategic priorities listed in its climate strategy. This provides a clearer direction of travel and includes more quantitative measures in the assessment. We will follow up in 2023 to understand progress against recommendations.

Background: The company manufactures pistons, oil and fuel filters, engine cooling systems for the main global car manufacturers. Privately owned by a foundation, its disclosures – from financials to sustainability – are weak, in our view.

Insight’s engagement: Insight engaged in Q3 2022 to seek the company’s commitment to a Science-Based Targets initiative (SBTi) certification for its net-zero targets and the publication of more frequent and thorough disclosures.

The company was not willing to respond to our proprietary ESG survey, but it provided sufficient and timely access to management. We discussed the company’s environmental performance and progress against targets, and established the company is making decent progress towards net-zero operations. For example, it is considering the use of SBTi for certification and setting a green bond framework.

In addition, we established the company possesses patents for several sophisticated products related to electric vehicles, such as a patent for a magnet-free electric motor that requires no rare-earth metals and close-to-cell cooling which enables fast charging.

Outcome: Following the meeting, we recommended the issuer obtain an ESG score from a third-party ESG data provider, as a lack of key ESG data coverage means the issuer has a near worst-in-class Prime ESG rating. We also indicated our preference for receiving financial and sustainability reports on a more timely basis, as well as disclosure of quarterly financial key performance indicators (KPIs). Finally, we stated our preference for more information in its financial statements including comparisons with the preceding year’s KPIs.

Background: The company is one of the bottlers for a multinational beverage company, operating plants in Europe, Africa and Asia. It produces, distributes and sells a wide range of non-alcoholic drinks.

Insight’s engagement: Insight engaged in Q3 2022 after the company issued a green bond. We sought more detail on the issuer’s green bond framework to understand its suitability for our Responsible Horizons strategies.

The clear use-of-proceeds commitment attached to the issue caused us to initially rate the green bond as a light green, indicating it fulfils our expectations for impact issuance. The issue’s use-of-proceeds commitment targeting a circular economy value chain and responsible management of raw materials were particularly interesting given these areas represent material issues for a bottling company.

However, our engagement led us to understand that refinancing will absorb 70% of the bond’s proceeds. Management also failed to provide detail on energy and water-efficiency thresholds, and disclosed refinanced projects have a lookback period of three years, in contrast to our preference for a maximum lookback period of two years. Finally, the energy-efficiency aspects of the bond have little impact on the UN Sustainable Development Goals, in our view.

Outcome: We downgraded the issuer’s green bond to a red rating, meaning it is excluded from our Responsible Horizons strategies. We will continue to monitor the issuer’s progress.

Background: The company operates a government-backed leasing scheme in the UK which allows anyone in receipt of a mobility allowance to lease a car, scooter, powered wheelchair, or wheelchair accessible vehicle. It possesses one of the largest car fleets in the UK.

Insight’s engagement: We engaged in Q3 2022 to focus on three areas: financing, the issuer’s provision of electric vehicles (EVs) and its carbon footprint. On financing, despite issuing three social bonds, the issuer sees no value in reclassifying existing debt as 'social'. Its ability to issue sustainability-linked bonds is limited by the influence of government policy on its operations.

Providing its customer base with EVs presents a challenge as many of its customers have little capacity to install the required charging infrastructure. For example, only 45% of its customer base have access to off-street parking. EVs and hybrids account for around 10% of its fleet but amount to 26% of applications. To alleviate these obstacles, the issuer is supporting its customers by offering free installations of charging points. Likewise, it is writing leases at a loss to enable the transition because of the high price of EVs, hoping that price parity between EVs and internal combustion engine vehicles occurs by the mid-2020s and starts to cross over by the late-2020s.

The issuer engaged consultants to determine its Scope 1, 2 and 3 carbon footprints. Scope 3 emissions represent the largest element of the company’s carbon footprint due to customer car use, and it recognises the importance of measurement and any targets to tackle it. The carbon footprint was developed for CDP reporting last year and the issuer achieved a B rating. Additionally, the issuer is producing its first standalone sustainability report this year.

Outcome: We identified issues with the issuer’s ESG reporting, which lacks clear metrics and targets to show performance, possibly reflecting little in the way of a coherent ESG strategy or a carbon targeting. However, its strong social purpose allows us to continue holding the issuer in our strategies with ESG-related constraints. Given the issuer will issue its first sustainability report in early 2023, we will reengage and monitor future developments in ESG reporting.

Background: We engaged with a high yield telecoms company on its worst-in-class Prime corporate ESG social rating of 5, which was driven by underlying MSCI scores. We believed the company’s disclosures could be improved to meet the requirements of external ratings agencies.

Insight’s engagement:Through our engagement we established that MSCI flags some disclosures as non-existent, not disclosed or that they lack sufficient detail. Labour management is an example of this, whereby MSCI stated that noncompensation benefits only cover selected employees, and that there was no evidence of variable incentive pay for non-officer staff. However, the company’s policies cover all staff in both instances. As a result, we believe MSCI’s assessment of the company is inexhaustive and the low social score is not truly representative of reality. We believe the issuer can improve its ESG score most meaningfully by strengthening its disclosures in several areas, including labour management. Likewise, prioritising the provision of better access to communications for elderly customers and low-income groups, and instituting employee training on ethical standards may help its social scores further.

Outcome: We provided feedback directly to the company on how it can improve its Prime social rating and the company indicated that it is committed to addressing most issues by next year’s reporting cycle. The REG reviewed the engagement and agreed that the Labour Management score in the Prime corporate ESG risk framework should be notched. This development caused the issuer’s social and overall Prime ESG ratings to improve to a 4 from a 5 (the worst possible). We will continue to monitor the company for further ESG developments.

Background: The company focuses on mining for metals such as aluminium, copper, gold, iron ore and tin. A workplace culture report conducted by a third party earlier in 2022 highlighted serious issues. It is also a member of several lobbying associations with practices misaligned with the Paris Agreement.

Insight’s engagement: Insight initiated an engagement in Q2 2022 to understand how the company is responding to findings from the workplace culture report, and to discuss its actions on climate change.

With regard to culture, the company is training management; has a new independent mechanism for staff to report grievances, leading to a 60% increase in complaints, with 30-40% of complaints leading to actions; and is working to make its washroom facilities more secure. However, it has not set targets or metrics regarding issues highlighted in the report. We encouraged the company to do so.

On climate change, the company does not have targets for Scope 3 emissions, which account for c.95% of its emissions. The company stated concerns around estimates required for calculating Scope 3 emissions, and that it does not want to force targets on its customers; we explained the expectation for companies to work with customers to reduce emissions.

We encouraged the company to use its influence within various lobbying groups to encourage change or consider its position in these groups.

Outcome: Since our engagement, the company announced it will leave a lobbying group controversial for its advocacy of coal. We will follow the company’s progress and re-engage in 12 months or sooner if any significant developments occur.

Background: The company is split into generation, transmission and distribution divisions. It relies heavily on coal-fired power and is a significant emitter of greenhouse gas emissions. The company has set a goal to achieve net zero by 2050, but expects to have two coal plants in operation by 2050.

Insight’s engagement: Insight engaged with the company in Q2 2022 as part of our dedicated climate change engagement programme due to the size of the company’s emissions. We also wanted to communicate Insight’s position on thermal coal.

We challenged the company’s plan to keep coal plants running in 2050, as scientific evidence suggests that coal must be phased out by 2040 globally to meet net-zero goals. The company stated that shutting down all coal by 2040 would mean insufficient electricity to meet demand, and that the policy environment would not allow for this. We explained that a failure to shut down its coal operations by 2040 would lead to Insight divesting its holdings. We also highlighted the benefits of reporting to external agencies to support the company’s ratings and consistent reporting across the industry.

Outcome: We placed the company on a watchlist of issuers which are not compliant with our position on thermal coal. We have since sent an email outlining our policy and expectations in more detail, and we will follow up with an engagement in six months to assess whether its exit from coal has been brought forward to 2040. We will also assess whether interim carbon targets have been implemented and if it has reported to a specified external agency for 2022.

Background: The company is focused on long-term ownership, management and development of social infrastructure and residential properties in the Nordics. Since early 2022, a research company has released reports on the company which included significant governance-related claims against the organisation relating to incorrect accounting practices.

Insight’s engagement: To understand the validity of the claims and how the organisation is responding, Insight has engaged with the company multiple times. Engagements have included meetings with the CEO and CFO.

One focus has been the company’s audit and accounting standards. We queried the CEO and the organisation multiple times about the details; the company stated its approach is consistent with international accounting standards, and we asked for written confirmation from its auditor or another external auditor. The company subsequently issued a public statement saying that its statements were independently examined by an external auditor, and in addition, it republished its most recent accounts with additional clarification and pledged to follow this approach going forward.

We believe several of the claims made in the research report require further validation and consideration. However, in our view, other parts of the company’s accounting need to be restated or clarified. We also have other questions that remain unanswered.

Outcome: We will continue to monitor further developments and responses from the CEO and the company. Our next steps will depend on progress.

Background: We targeted a chemicals company for engagement due to its worst-in-class Prime ESG scores, including an E score of 5 driven by poor disclosure and environmental controversies. We engaged with this company initially in 2021 to understand the reasons why it does not have a carbon reduction target, and to understand what measures the company has put in place to mitigate the risk of further controversies occurring.

Insight’s engagement: Following our initial engagement, we monitored the progress of the company, and we were pleased to see that it announced a target to reduce Scope 1 and Scope 2 emissions per tonne of production by 20% by 2030 (from a 2016 baseline). We followed up with a more detailed engagement in 2022 to understand progress and identified the following areas for improvement:

• It has set a 2030 carbon-reduction target but not a net-zero target.
• It does not currently report against TCFD recommendations (or disclose to the CDP) and is therefore unlikely to
  have completed sufficient assessment of its climate-related risks and opportunities, in our view.

Outcome: After our engagements, an improved communication strategy by the company and more transparency on its efforts to reduce carbon emissions helped to improve the E score underlying its Prime Corporate ESG rating, from a 5 to a 4. We will re-engage in 12 months, monitoring any progress made.

Background: We engaged with a Swedish real-estate lending platform which acts as an intermediary between borrowers and lenders to facilitate financing for real estate projects.

Insight’s engagement:Sweden has high benchmarks for new residential projects, with every project needing a climate impact declaration along with an energy efficiency declaration. Insight engaged with the company to create requirements for Insight lending through the platform, seeking to incentivise the origination of more energy-efficient projects. While the minimum standard in Sweden for new residential projects is high, we sought to incentivise projects that materially exceed the minimum requirements.

Outcome: We agreed that Insight’s funding will finance projects with an energy efficiency at least 20% above the minimum standard. Any project which achieves energy consumption of less than or equal to 50kwh/m2 will get a discount of 10bp on the margin applicable for that project on the Insight financing. Through these requirements, we are directly, measurably and financially investing the origination of more energy efficient projects. We will monitor the platform’s progress and will follow up when we receive lending data from the platform.

Background: The company operates as a government agency, maintaining and managing power and water projects across the country. It has no ESG ratings from leading data providers, and the ESG ratings it does have are of its government (rather than the company itself).

Insight’s engagement: Insight initiated an engagement in Q1 2022 to discuss the company, the execution of its capital expenditure plan, and to engage on ESG issues, particularly on governance and disclosure. The engagement was instructive, highlighting that the company has no independent board members, is transitioning towards compliance with international accounting standards, and that governance safeguards are in place.

Outcome: We were encouraged by the open engagement, and the Insight Ratings and Exclusions group subsequently determined that it would be appropriate to generate Prime ESG ratings for the company separate from its government, based on Insight’s proprietary ESG survey. We are committed to continued engagement with the company.

Background: The bank provides banking, life insurance, and related services for individuals, small businesses and medium-sized commercial enterprises. It also offers corporate and general banking, international financing, institutional banking and stock broking and fund management. It has signed up to the Net Zero Banking Alliance.

Insight’s engagement: Insight engaged with the bank in Q1 2022 following its annual results announcement, and sought to understand its transition plans, and how it seeks to integrate ESG factors within its lending activity. Regarding its transition plans, it remains committed to publishing plans and targets for the four most intensive sectors on its balance sheet (thermal coal mining, upstream oil, upstream gas and power generation) this year, and will develop plans for the rest of its exposures over the next three years. For its lending activity, all loans over AUD30m are required to complete an ESG risk assessment at origination and annually, which covers topics from climate to modern slavery. All medium or high-risk assessments require additional due diligence and engagement with the client; if minimum requirements are not met, the bank is willing to exit client relationships.

Outcome: We were encouraged by the discussion, particularly around the bank’s ESG risk assessment and willingness to exit client relationships when necessary. We await the publication of its transition plans and will look to engage again in 2022.

Background: The bank offers retail and commercial banking services, as well as consumer, commercial, and agribusiness loans, asset management, foreign exchange, pension, insurance, lease financing, credit cards, and internet banking services. Its Prime ESG rating is 4, consisting of environmental and social ratings of 2 and a governance rating of 4 (1 is the best possible rating, 5 the worst possible).

Insight’s engagement: We engaged with the bank in Q1 2022 to discuss the details of its social bond framework. The bond’s use of proceeds were well defined with appropriate target populations, in our view, and there are processes are in place to identify and mitigate ESG risks. The majority of proceeds will be for financing new projects, but there was no maximum lookback period for refinancing. The bank is committed to producing annual allocation and impact reporting with relevant key performance indicators.

Outcome: Under Insight’s impact bond assessment framework, we rated the social bond as light green, indicating it was suitable for investment within our impact-focused strategies. We provided feedback to the bank that the framework could be improved and rated dark green if appropriate information regarding a maximum lookback period for refinancing, and a reinvestment process, were provided.

Background: The company in question operates as a port operator and operates marine terminals and handles cargo containers. It is the 100% shareholder of a company that was at the centre of a major social controversy in 2022 when it made a large proportion of its workforce redundant without union consultation. This was widely criticised in the media and parliament.

Insight’s engagement: We engaged with this company to understand the reasons that it did not follow the recommended process with regards to the redundancy consultation period. It was clear from our discussions that the company would not change the approach they took, and they did not regret any decisions that were made. This did not fill us with confidence that they would not attempt to bypass law or recognised processes with other companies that it owns.

Outcome: As a result, we escalated this issue to the Ratings and Exclusions Group, and it was agreed to place restrictions on funds with relevant sustainability criteria, and it was labelled unsuitable for our strategic credit portfolios. We will continue to track developments to the situation as they arise in the news (e.g., the outcome of criminal and civil investigations) and will re-engage if any significant developments occur.

Background: A provider of integrated telecommunications services in Latin America, the company has a worst-in-class Prime corporate ESG rating for governance, given a controlling shareholder and lack of diversity and skills on its board.

Insight’s engagement: In Q4 2021, we engaged on various governance concerns, including the lack of intention to remove representatives of the controlling shareholder from the board, the lack of gender diversity, and the ‘overboarding’ of one individual with multiple board memberships.

Outcome: The company was set to conduct its first comprehensive board review in late 2021, with results to be published alongside its sustainability report in early 2022. The company committed to setting and disclosing ESG targets in the report. We will assess the outcome of the board review and progress on targets in our future engagements.

Background: The company invests in high-quality real estate assets across Europe, with investments concentrated in logistics, residential and office sectors. It announced a green bond in late 2021, with use of proceeds earmarked for green buildings, renewable energy, energy efficiency, clean transportation and tenant relationships.

Insight’s engagement: Insight joined an investor call focused on the green bond issuance. We shared feedback on the green bond framework, including our disappointment over weak minimum standards for green buildings, and a lack of commitment for when full allocation of the bond’s proceeds would be achieved.

Outcome: The company did not respond to our feedback. Insight’s impact bond assessment framework rated the green bond as ‘red’, and as a result we did not invest in the bond for our impact-focused strategies.

Background: We engaged with the company some years ago when ESG topics were given due consideration, but new management did not initially adopt a forward-thinking approach to disclosing ESG targets and objectives. We maintained ongoing dialogue, promoting further disclosure, receiving detailed input from the company so we could assign internal ESG ratings.

Insight’s engagement: In Q4 2021, we engaged with the company with a focus on understanding how it was approaching the formalisation of its ESG policy and improving reporting standards. In particular, we encouraged the company to formulate key performance indicators around carbon emissions and targets for emissions reduction; and to improve the gender diversity of its workforce, of which only a small minority was female or in leadership positions.

Outcome: We received detailed input from the company, enabling us to assign Prime ESG ratings. As a result of progress made by the business, and its open engagement on the issues we raised, we remained invested. We have committed to continued dialogue to track the company’s progress towards specific, time-bound targets on emissions reductions and diversity in its leadership positions. We will also encourage the company to use sustainability-linked debt (where the cost of the debt is linked to progress towards stated targets) for any future debt issuance.

Background: In 2018, the company was a laggard with regard to climate risk according to our Prime corporate ESG ratings. It was unclear how it was taking climate change into consideration when making investment decisions and it was not reporting against the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD).

Insight’s engagement: We began our engagement with this company in 2018 as a result of its Prime corporate ESG rating. When we raised the problems we had identified with the issuer, we found that it was driven by financials and did not seem engaged on climate change issues. As this engagement was disappointing, we flagged the issuer to monitor closely and reengage regularly to understand sentiment. Our most recent engagement was in 2021.

Outcome: The company now reports in detail against the TCFD recommendations, is developing decarbonisation pathways to support net zero targets, and a Chief Sustainability Officer was appointed in 2021. We look forward to continuing the conversation and seeing progress in 2022.

Background: In 2021, Insight performed due diligence on a senior note proposal. It was sponsored by a large US investment bank and backed by a pool of residential and commercial properties originated by a specialist bridging finance lender. Independent bridge lenders tend to be small (with portfolios no larger than $200m) as scaling up is challenging given the short-term nature of the loans. Meanwhile, the returns on offer can make a small-scale business model viable. This means originators typically have small teams and tend to rely heavily on key management and their founders, concentrating control of the business and policies around a few key individuals. Insight’s due diligence on the lender revealed its specialist capabilities and performance to be compelling, in our view. However, our ESG scoring output flagged ‘room for improvement’ within governance.

Insight’s engagement: Insight worked with the lender and the US bank, advocating for the inclusion of an independent director on the lender’s board to improve governance, impartiality, risk management and diversity of control.

Outcome: The originator agreed to seek an independent board member.

Background: The company leases diesel generators for the oil and gas sector, and mining sector, in emerging markets. It has no third-party or Prime ESG ratings, and was taken into private ownership in early 2021.

Insight’s engagement: In Q3 2021, we engaged with the company to conduct due diligence on ESG issues, and to better understand its strategy to transition its generators from diesel to a mix of gas, battery and solar power.

Outcome: We declined to invest in a new issue from the company given our concerns over the transition story, and in view of the company’s stretched financials under private ownership.

Background: The bank had the worst possible Prime corporate ESG rating of 5, driven by a range of issues:

• Environment: it appeared to have no sustainability strategy or focus on carbon, and significant exposure to destructive products;
• Social: it has risky loan offerings and no training for employees
• Governance: it had an entrenched board and very aggressive accounting practices

Insight’s engagement: Insight met with the bank’s management to discuss ESG risks. The bank was able to respond to each of the issues we raised with documentary evidence, though the entrenched board remains an issue. We concluded that the bank’s ESG rating and other issues were highlighted largely due to incorrect or incomplete information on the part of third-party ESG data providers.

Outcome: Given the issuer’s satisfactory response, we continued to hold its bonds. We encouraged the issuer to engage with the ESG data providers and correct the misinformation.

Background: The company’s emissions reductions strategy targeted less than half its total carbon emissions. In our investment universe, the company is one of the largest carbon emitters in absolute terms, but is a clear laggard in how it will mitigate climate risk (the company has a Prime climate risk rating of 5, the worst possible rating). We believed this was not reflected in the market pricing of the company’s bonds.

Insight’s engagement: In Q2 2021, we engaged with the company. Our objective for the engagement was to raise our concerns that the emissions reductions strategy of the company was insufficient.

Outcome: We were not satisfied with the company’s response to our concerns. While we consider its default risk to remain very low, we have sold its longer-dated bonds from almost all strategic credit portfolios, where client guidelines allow. We will monitor the evolution of the company’s climate strategy – we expect pressure from other investors and stakeholders to build.

Background: The company proposed a green bond framework which included the rollout of 5G as a green use-of-proceeds bond, based on the principle that data loads faster which makes it more efficient.

Insight’s engagement: In Q2 2021 we engaged with the company to provide our feedback on best practice regarding green bond frameworks. We explained its proposal was not in line with our assessment process for a green bond as there was not enough evidence to support the environmental benefit of the initiative.

Outcome: In line with Insight’s view, the CFO subsequently decided that most of the organisation’s capital expenditure was 5G-related and ‘business as usual’, rather than providing an incremental environmental benefit, and therefore did not justify an green bond as proposed. The company has since released a sustainability-linked bond framework which we found to be more closely aligned to the ICMA Sustainability-Linked Bond Principles, and is therefore suitable for inclusion in our impact-focused strategies.