Bondholders are starting to use their power to influence corporate behaviour in areas such as climate change, social inequality and biodiversity loss.
The financial institution Barclays had long been unresponsive and a laggard in terms of acting on climate change, being one of the largest financers of fossil-fuel projects, such as coal and oil, worldwide. Aviva Investors is invested in both the company’s bonds (IOUs issued by governments and companies like Barclays) and equities. We talked directly to Barclays to encourage a more robust response on climate change, and Barclays responded positively, including announcing a market-leading ambition to reduce the carbon emissions of its financing activities.
Bond investors can drive change
This shows that, while investor influence has long been confined to that of equity shareholders, bondholders can also wield a lot of power. That is important if the world is to make progress on issues such as climate change: companies around the world raised $5.5 trillion by issuing bonds in 2021, almost four times the amount raised by issuing shares. The trend should continue as companies take advantage of (still) low interest rates, which exert a key influence over bond markets.
Many companies that issue bonds do not necessarily raise money through equities
In addition, many companies that issue bonds do not necessarily raise money through equities. Consequently, it is possible to engage with a lot of companies in fixed income that you cannot access via the stock market. Moreover, companies in sectors with high carbon emissions, such as airlines, raise significantly more money through bonds than through equity.
Businesses also tap bond markets for finance much more frequently than they try to access equity markets. “Companies may raise equity once every 20 years; yet some companies come to the debt markets every six months,” says James Purcell, group head of ESG, sustainable and impact investing at Quintet Private Bank. That provides an opportunity to talk to the companies and try to change their behaviour.
Many companies that issue bonds are privately owned – i.e., they aren’t listed on stock exchanges. Investors a much greater opportunity to influence such companies than shareholders.
Several private companies have only just begun to address issues such as climate change, so it is possible to have a greater impact by talking directly to these businesses than by engaging with large public companies that already have policies in place.
Equity and bond investors can exert even greater pressure for change when they join forces
Equity and bond investors can also exert even greater pressure for change when they join forces. “If they do that, they can bring more money to the table and have a bigger voice,” adds Hortense Bioy, global director of sustainability research at Morningstar.
The next frontier for bond investors is to engage with governments that raise money through the bond market. Many governments, particularly in emerging markets, are keen to talk to bond investors and tap into their knowledge.
Three points to remember
- Investor influence has long been confined to that of equity shareholders, but bondholders can also wield a lot of power
- In some instances, bondholders can exert more power. For instance, many companies that issue bonds do not necessarily raise money through equities
- Many governments, particularly in emerging markets, are keen to engage with bond investors