Bondholder engagement toolkit

Indices shape capital flows. Passive funds directly invest only in eligible instruments, and active funds target outperformance, and so are driven by benchmark inclusion.

Index use is deeply embedded in market practice, and has the potential to reinforce transition accountability.

Index providers are motivated to create indices that investors want, so there is leverage in this relationship.

This combines legitimacy (as is linked to the issuer's needs for funds), power (threat of funds being withheld, or additional terms for those funds), and urgency.

Once refinancing is secured, investor influence is reduced.

AFII's Bond Horizon helps predict issuance to support this tool.

Public expectations from asset owners, leading to high profile manager changes, are often not represented in formal written mandates which prioritise financial return.

Asset owners can hold significant power to influence terms with their managers.

Mandates are subject to periodic review, allowing engagement requirements to be reviewed.

An extension of Sustainability-Linked Bond developments where bond economic terms are linked to performance against KPIs.

Formalises an investor divestment option based on KPIs.

May require pricing concession to be acceptable.

Collective engagement is a well-established strategy in equity markets, where groups of investors work together to add influence to their issuer discussions.

Several investor networks have fixed income specific work streams to support these interventions.

Such collaboration saves time, as work can be shared between investors.

Investors often hold several products with the same issuer.

When engagement objectives are fully aligned, using routes via all invested products can increase influence.

Requires internal coordination within investors.

There are opportunities for issuers to raise the profile of climate and nature related disclosure and strategy in their investor dialogue.

Where this is encouraged by investors, the quality of issuer-investor understanding increases.

If a pricing reaction in bond spreads were observed, this could further incentivise.

MAR concerns are often cited for lack of collaboration in fixed income markets, despite such coordination being more common in equity markets.

Regulatory clarity could allay concerns.

Many fixed income investments are held via custodians or in managed accounts, and with limited exceptions legal and beneficial ownership will not be disclosed.

If investors can make strategic disclosure of collective holdings, that signals the weight behind their engagement objectives, and supports collaboration.

This could also be incorporated in asset owner mandates.

This proposes tighter covenants which are traditionally used in high-yield debt markets.

Issuer reluctance restricts the feasibility, but may improve if the borrowing landscape for high-emissions issuers deteriorates.

Can be tailored to specific climate- or nature-related objectives.