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

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: 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 formalization 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 organization’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.