Guiding bondholders on promoting climate action within fixed-income investments: strategies to implement change
In the face of escalating climate change concerns, bondholders are taking active steps to promote stewardship, accountability, and engagement on climate change within their portfolio companies. Here are some practical next steps for bondholders to improve climate stewardship:
Regular, Constructive Engagement with Issuers
Bondholders can maintain ongoing dialogue with issuers to understand and influence their Environmental, Social, and Governance (ESG) strengths and weaknesses. This dialogue, leveraging frequent bond issuance cycles, encourages improved climate practices even without shareholder voting rights [2][3].
Use of Standardized Methodologies
Adopting standardized methodologies, such as the Physical Climate Risk Appraisal Methodology (PCRAM) 2.0, enhances portfolio-level climate risk assessment by incorporating systems thinking and asset interactions for better engagement and stewardship [4].
Adoption of Thematic or Labeled Debt Instruments
Bondholders can invest in green bonds, sustainability-linked loans, and transition bonds, which are specifically structured to address climate issues. These instruments should have clear Key Performance Indicators (KPIs) and financial incentives aligned with emission reductions, supported by simple, scalable guidelines [1].
Transparent Disclosures on Use of Proceeds
Ensuring capital is directed towards clearly defined climate-related activities is crucial. This includes reporting challenges, but encourages standardized reporting aligned with frameworks such as the International Capital Market Association (ICMA) green bond principles and Climate Transition Finance Handbook [1].
Publishing Regular Transparent Engagement Reports
Providing accountability for stewardship efforts, such as quarterly summaries of borrower meetings and actions taken, enhances trust and market discipline [2].
Collaboration through Investor Coalitions and Networks
Collaboration through investor coalitions and networks like the Institutional Investors Group on Climate Change (IIGCC) coordinates investor actions, shares best practices, consults on methodology frameworks, and promotes standardized climate risk assessments across portfolios [4].
Providing Technical Assistance and Funding
Conditional on climate outcomes, providing technical assistance and funding supports portfolio companies’ transition efforts in a way beneficial to both bondholders and companies [1].
By adopting these practices, bondholders can align capital deployment with measurable climate goals, improve disclosure and data quality, and foster active, collaborative investor stewardship for systemic engagement on climate change in fixed income portfolios [1][2][3][4].
Prioritizing Engagement
Prioritizing engagement with highly debt-dependent industries in high-emitting sectors, investors with net-zero goals engaging with portfolio companies on climate through their corporate bond holdings, and prioritizing engagement with sovereigns on their Nationally Determined Contributions and decarbonisation pathways are also key strategies [1][4].
Evolving Disclosures and Accountability Mechanisms
Asset owners and managers have the opportunity to make their bond investment stewardship more effective through evolving disclosures, strengthening accountability mechanisms, and using novel financing structures [1].
The Bondholder Stewardship Working Group, formed in 2022-23, focuses on issuer-issuance alignment and an ecosystem approach to bondholder stewardship. In 2024, the Group published guidance on stewardship for both sustainability-linked and unlabelled debt [5].
As we move forward, 2025 is an important year for regulatory disclosure advancements, providing an opportunity to select and aggregate relevant bondholder information, especially on transition finance strategy, capital structure strategy, and enabling and transition activities [5].
However, it's important to note that the lack of standardization, accountability, and escalation mechanisms can undermine the effectiveness of bondholder engagements on climate [5].
In conclusion, there are numerous opportunities for bond investors to better engage with their portfolio companies, banks, regulators, and the overall bond ecosystem, contributing to a more sustainable and climate-resilient future.
- Environmental-science research could be commissioned by bondholders to gain deeper insights into the climate-change impacts of their portfolio companies, enhancing their understanding and influence.
- To further their climate-stewardship efforts, bondholders could explore strategic investments in innovative environmental technologies, thereby financing solutions that mitigate climate change, and generating attractive financial returns.
