Authors

Building on our studies showing a strong relationship between the environmental, social and governance performance...

How bondholders can engage companies for the benefit of all stakeholders

ESG is being codified as mainstream across the globe.

In this podcast, Eoin Murray, Head of Investment, is joined by Mitch Reznick, Co-Head of Credit and Head of Credit Research and Hans-Christoph Hirt, Head of Hermes EOS and Stewardship Services to discuss the first instalment in a two-part paper we have recently published titled ‘we can all get along’.

The perceived divergence of priorities between bondholders and shareholders has led some to believe that these investors cannot engage with companies on the same issues. Some – remarkably - even question the legitimacy of bondholders (or other creditors) engaging with companies in the first place. However, given their financial stakes in a company, both types of investors not only have legitimate cause to engage, but also a professional duty to do so. So say, Mitch Reznick, Co-Head of Credit, and Dr. Hans Christoph-Hirt, Head of Hermes EOS, in We Can All Get Along, a new report dispelling myths surrounding joint company engagements between bondholders and long-term shareholders. Writing in the paper, the authors argue that the difference in the payoff profile of equities and bonds is sometimes cited as a reason that bondholders focus less on long-term factors, while shareholders want to see growth. However, there are strategic issues which the pair highlight as being relevant to a company’s current and likely future health and value creation, including the management of ESG (environmental, social and governance) factors. Arguing that although the cash flows from bonds held to maturity will not alter unless operating cash flows are substantially impaired, the authors highlight that unmitigated risks can weaken a company’s ability to fulfil its debt-service obligations.

In this two-part paper, we assert that the shared interests of bond and shareholders in companies provide incentives to jointly engage companies – and generate positive outcomes by doing so. In this first instalment, we dispel the fallacy that the imperatives of bond and shareholders typically diverge, and argue that their common standing as financial stakeholders gives them the legitimacy to engage corporate boards and management teams to encourage sustainable growth and long-term value creation.

In this podcast, Mitch Reznick, Co-Head of Hermes Credit & Head of Credit Research, looks at how ESG integration manifests itself across the varying fixed income products at Hermes. The following principal members of each of the fixed income teams join Mitch to discuss how ESG integration and engagement works for them: Patrick Marshall, Head of Private Debt & CLOs, Vincent Nobel, Head of Asset Based Lending and Andrew Lennox, ABS Portfolio Manager

ESG investing is an established practice in equity markets, where shareholders can exercise voting rights and engage companies on sustainability concerns. In this Hermes podcast, we ask: why is analysing environmental, social and governance risk – or ESG risk – important for fixed-income investors?

Valuations in the US public hospital sector are looking attractive, and that’s led us to reassess the investment opportunities within the US high-yield healthcare universe. But a highly selective approach is needed. New research by Mitch Reznick, Co-Head of Credit and Geoffrey Wan, Credit Analyst at Hermes Investment Management looks at the factors causing volatility as well as the opportunities in this market. Mitch and Geoffrey, said: “Although the sector is often viewed as defensive and non-cyclical, hospitals in the US are facing a structural, secular shift. US healthcare spend per capita is the third highest in the world, at around 18% of annual GDP. However, by most metrics the quality of healthcare in the US is not viewed as commensurate with this level of spending. As such, scrutiny of insurers and patients’ demands for lower costs have driven a move away from the fee-for-service model that healthcare providers are familiar with to a model that demands value and quality in exchange for payment.”