CREDIT RESEARCH EXAMPLES OF ENGAGEMENT
1) Peking University Founders Group – We met with management as part of the international bond roadshows, trying to understand the firm’s heightened funding appetite in 2018. After several interactions with management during 2019, and after analysing the latest financials, exposure to the name was lowered and subsequently sold completely. Our ESG risk rating had been increased to ‘Very High’ and the internal credit rating had been downgraded into the high yield category. These moves primarily reflected intensifying governance issues relating to ongoing shareholder disputes and various related negative headline risks. Further, an aggressive management appetite was resulting in the rapid expansion into non-strategic mandates as the firm sought to become a more commercialised conglomerate. Since the disposal, the bonds have depreciated sharply.
2) CNH Industrials: We met with CNHI at a none-deal investor roadshow to establish an initial understanding of the underlying business and their management of ESG risks. Main concerns raised was the sustainability risks in their supply chain and how CNHI are managing those, and their stated aim of meeting specified SDG’s. We followed up on these issues at a subsequent meeting with CNHI at the Kanga conference to determine if further disclosure was available. We were briefed on the progress they have made but finer details were still awaiting permission to be externalised. We retain our High Risk ESG assessment of CNHI driven mainly by modest transparency in reporting, moderate risk from product governance, a large part of their business exposed to farming which in turns is exposed to environmental factors beyond their control and a large exposure to commercial vehicles which is under greater scrutiny to use cleaner fuels.
3) Sydney Airport. We engaged in a one-on-one meeting to address our concerns around PFAS contamination from a prior tenant on one of its industrial commercial buildings within the Sydney Airport land precinct. Sydney airport had defended safety of the site, on the belief that so far the scientific community’s verdict on PFAS has not been conclusive. We sought understanding on the steps to be taken including working with government authorities to assess risks to workers, monitor contamination levels and agreed to touch base again in 2020 on the issue. Our ESG risk assessment for Sydney Airport was affirmed at Low.
4) Origin Energy (electricity utility): At a debt investor meeting we engaged with management to understand the strategy and progress towards its sustainability commitment Management highlighted support of the Paris Agreement to limit the world’s temperature rise to below 2 degrees Celsius and that they remain committed to exiting its coal-fired generation by 2032. The company is on track to have more than 25% owned and contracted generation capacity from renewable and storage by 2020.
5) Engagement with the Australian banks post the Royal Commission. Our discussions focused on governance and social concerns in light of the findings of the Royal Commission. Remediation is ongoing and we will continue to follow up on progress on improvements to its processes and systems.
6) Verizon: The company held a non-deal roadshow to discuss ESG issues in February 2019, as well as to gauge interest in green bond issuance from the company. We discussed Verizon’s environment strategies and targets, and encouraged the company to continue focusing on green initiatives along with providing a high level of disclosure. We communicated the importance of ESG to our global investment process and indicated strong interest in a potential green bond, and also made clear the importance of a credible second-party opinion on the issuance. Ultimately, Verizon issued a $1 billion ten-year green bond to fund renewable energy, energy efficiency, green buildings, sustainable water management, and biodiversity and conservation, with an aim to positively impact the environment and advance U.N. Sustainable Development Goals. The deal received a second-party opinion from Sustainalytics. This marked the first green bond issued in the United States from a telecommunications company. We followed up with Verizon in September 2019 and expressed our support for additional green bond issuance in the years to come, to help develop a stronger culture of sustainable financing in the US.