20 pledges for 2020: Can bond investors convince companies to create a better future?
Kames Capital says companies are responsive to investors who lend to them by buying their IOUs
Corporate bondholders don＊t, in theory, have as loud of a voice as shareholders.
They take less risk. Their interest payments, or coupons, are preserved even when dividends are being suspended or slashed, as they are now.
Their money is repaid at maturity unless a company goes insolvent, at which time they have a prior call on the assets. As a a result, they don＊t get a vote on big corporate decisions; takeovers and mergers, approving the new CEO and suchlike.
Kames Capital argues that they nonetheless can, and should, still bring their influence to bear on corporate behaviour.
The money manager, which has a long presence in the ethical investment market, says its programme of engagement with companies that its bond funds invest in has proven effective.
This isn＊t too surprising. Companies need to find buyers for their IOUs, so it pays to keep big bondholders sweet, now more than ever given the impact of the novel coronavirus on corporate balance sheets.
A lot of them are going to be knocking on doors in the hopes of finding fresh financing. Some of them may need to ask their lenders for help, which could include their bondholders as well as their banks.
Just as with equities, investors in bond funds have a choice to make over the level of ESG (Environmental, Social, Governance) screening.
Take Kames, for example. It has an Ethical Corporate Bond Fund and a Cautious Managed Fund, which is made up of 60 per cent equities, 40 per cent bonds.
The two have the same screening criteria as the ethical equity fund, which is very much at the stricter, or ※dark green§ end of the industry.
Just as with shares, bonds issued by companies are excluded if they have a poor record on the environment, or animal welfare issues. Armaments, nuclear power, genetic engineering, pornography are similarly grounds for ruling out investment.
Ditto the paper of companies deriving more than 10 per cent of their business from alcohol, tobacco or gambling. Operating in countries poor human rights records is a no no. So is making political donations of more than ?25,000. Banks with large exposures to third world debt are out too.
That＊s a rather extensive list, one that may be too much for some. There are plenty of people who may, for example, be untroubled by investing in debt issued by brewers or distillers which would be excluded by those funds.
Gambling is no less controversial, but a lot of people like to spin the wheel and mightn't be too worried about having holdings in debt issued by the companies that provide them with their thrills. If the house always wins, it pays to have some money in the house.
There are ※lighter§ green options available for those in these groups but it would still pay to pick one run by a manager willing to engage with these type of businesses with a view to keeping them responsible.
Whether to exclude or invest and engage is a matter of personal preference.
But while bond investors mightn＊t have votes, they are still capable of twisting arms being the scenes, especially at a time like now. Some are willing to do that. Some will just sit back and pocket the fees they charge you.