Chapter 6 pt 4

Question 1

Despite their public equity focus, how are stewardship codes applicable across asset classes?

Answer 1

1. They are principle-based and can be adapted sensibly to various investment types.

Question 2

How does engagement differ between direct investments and fund structures like private equity?

Answer 2

1. In fund structures, engagement is with the fund manager, not the underlying assets.

Question 3

What remains essential across all asset structures, regardless of ownership model?
1

Answer 3

1. Accountability and the need for alignment between investors and managers.

Question 4

In more indirect investment structures, what are engagement issues normally like?

Answer 4

1. Related to policies an approaches regarding ESG issues
2. Rather than specific individual asset concerns
3. Can be specific if individual asset demonstrates that the policy approach is not what the investor expects

Question 5

How did CalSTRS demonstrate responsible investment influence in private equity regarding gun manufacturers?

Answer 5

1. In response to U.S. school shootings, CalSTRS advocated for excluding gun manufacturers and retailers from private equity holdings.
2. This led private equity firm Cerberus to allow CalSTRS and other investors to exit their investment in Remington Outdoor in 2015, showing how asset owners can apply ESG principles even within indirect or private investment structures.

Question 6

In relation to fixed income, what does PRI’s guide “ESG Engagement for Fixed Income Investors: Managing Risks, Enhancing Returns” recommends that investors prioritize engagement based on?

Answer 6

1. Size of a holding in the portfolio
2. Credit quality of the issuer (noting that issuers with less balance sheet flexibility are typically less able to absorb negative ESG impacts)
3. Duration of holdings
4. Quality of transparency on ESG (noting issuers with low ESG scores)
5. Specific markets and/or sectors, and
6. Specific ESG themes

Question 7

When is the greatest opportunity to push for conditions and disclosures around ESG likely to be in relation to fixed income?

Answer 7

1. Prior to issuance of particular bit of debt
2. When company needs investors to provide funds - more likely to be receptive to their views
3. In periods of rising interest rates, investors will have greater leverage and should use it under those conditions
4. Easier in private debt issues as supply of funds is still less crowded in such markets

Question 8

Who do investors interact with in regard to corporate debt issuers?

Answer 8

1. Corporate treasury departments rather than more senior officials
2. Talk about strategy, risk, financial structure (especially where the proposed debt sits in the debt hierarchy), and the covenants and protections for debt investors.
3. Increasingly talk about ESG

Question 9

When is there maximum and least overlapping interest between equity holders and debt investors?

Answer 9

1. High investment grade (low risk of default): most overlapping interests
2. Low speculative grade (point of default) no overlapping interests

Question 10

When is influence over fixed income company strongest?

Answer 10

1. Debt and equity investors engage jointly
2. Investment firms coordinate ESG engagement across all asset classes within the same company

Question 11

Describe stewardship interaction with sovereign debt issuers

Answer 11

1. Likely to be more limited
2. Only the largest investors are likely to have any scope to influence the stance of nation-states, and even then, the influence may be minimal.
3. Therefore, the ESG approach usually applied in this asset class is screening or an ESG tilt in the investment process rather than engagement.

Question 12

what are some suggestions of how engagement with sovereign debt issues could work?

Answer 12

1. Educating sovereign issuers about the value of green bonds and the strong market appetite for such instruments
2. A further area for engagement with countries is the protections they have in place for the rule of law—given how fundamental it is as a foundation for future economic growth and fair treatment of all citizens

Question 13

What is case study of sovereign debt engagement?

Answer 13

1. 29 invesotrs encouraged Brazilian gov to do more to limit destruction of Amazon
2. Wrote to the company
3. Had contact trhough Brazilian embassies in home nations
4. Some of group considering divesting existing holdings and excluding Brazilian debt from sovereign portfolios
5. Unclear if had positive influence

Question 14

Describe engagement with private equity

Answer 14

1. direct ESG engagement will be undertaken by the general partner (GP, the private equity house) rather than the limited partner (LP, the asset owner)
2. although individual LPs may wish to engage with their GPs on the ways in which they are monitoring and acting on ESG issues across their portfolios
3. The poor quality of the governance of a number of companies coming through the private equity system suggests that less effective ESG is often instilled in private equity companies than ought to be the case given the levers that private equity investors hold.

Question 15

Describe engagement with infrastructure

Answer 15

1. Infrastructure investors are exposed to ESG across the economic lifetime of their assets.
2. PRI notes that infrastructure investing is particularly compatible with responsible investment because of the long-term nature of the asset class, its focus on essential services, and its contribution to achieving key sustainability outcomes, such as investments in assets/portfolio companies that support an energy transition in line with the UNFCCC Paris Agreement.

Question 16

What are the 8 potential mechanisms the PRI recommend that investors consider to act as engaged owners in infrastructure?

Answer 16

1. Use ESG assessments undertaken during due diligence to prioritise attention to ESG considerations and potential for improving profitability, efficiency and risk management.
2. Include material ESG risks and opportunities identified during due diligence into the post-acquisition plan of each asset/project company and integrate this into asset management activities.
3. Engage with and encourage the management of the business to act on the identified ESG risks and opportunities using the mechanisms available.
4. Define and communicate your expectations of ESG operations and maintenance performance to the infrastructure business managers.
5. Ensure [that] ESG factors identified as material during due diligence are explicitly woven into asset-level policies.
6. Advocate [for] a governance framework that clearly articulates who has responsibility for ESG and sustainability, the company board’s accountability[,] and oversight of ESG considerations.
7. Set performance targets for preserving or improving environmental and social impact, including regular reports to the board and investors.
8. Where possible, make ESG information and expertise available to the asset or project company to help it develop capacity and management skills in this area”

Question 17

What is similarity with investors of private equity, propery and infrastructure?

Answer 17

1. Many are indirect investors
   2. Work with specialist managers

Question 18

What does the PRI say indirect asset owners should do concerning stewardship?

Answer 18

1. Cannot make or materially influence specific investment decisions
2. Can influence the investment manager’s decision making process- fiduciary duty
3. Asset owner should include responsible investment considerations in its selection, appointment and monitoring of external managers

Question 19

What else can asset owners involved in infrastructure do in terms of communication?

Answer 19

1. request periodic reports on engagement activities and ESG performance;
2. set clear expectations for when and how the fund manager should report material, adverse ESG incidents;
3. provide examples to illustrate what they consider severe and what constitutes a material ESG incident;
4. engage with managers on ESG issues through forums such as LimitedPartnership Advisory Committees (LPACs)”

Question 20

What is evidence on impact of implementation of ESG-focused policies on real estate returns?

Answer 20

1. Multiple studies link real estate investments that integrate ESG criteria with lower risk or higher returns
2. But another study found that REITs with higher ESG performance scores have lower firm value and operating cash flow - may overinvest in ESG activities at expense of shareholder value

Question 21

How should infrastructure investors engage ?

Answer 21

1. Indirectly by requiring their managers to report on the frameworks and metrics they use to monitor holdings
2. engage, directly or indirectly, on public policy to manage risks;
3. Support research on ESG and climate risks;
4. support sector initiatives to develop resources to understand risks and integrate ESG

Question 22

How should engagement happen in funds investments?

Answer 22

1. Typically a fund board, which should represent investor interests
2. Investors are often distanced from underlying assets, but role is to hold to accounts the managers of the fund for their own investment and stewardship efforts
3. Closing agency gap can be harder but is possible