Green bonds boom boosts case for credit engagement

EOS has engaged with companies on behalf of bondholders for many years, recognising that credit portfolios can be hard hit in the wake of serious controversies. Ross Teverson explains how we have evolved our engagement approach as the size of the sustainable bond market has grown.

Over the past five years, there has been strong momentum in sustainable bond financing, with the green, social, sustainable, and sustainability-linked bond (GSSSB) market expanding from just over US$200bn in 2018 to $946bn in 2023, according to Moody’s. With this increased issuance, we are seeing more regulatory scrutiny of issuers’ sustainability strategies. This has helped to drive greater awareness and acceptance of bondholder engagement.

We have been advocating for the value of engaging across the capital structure since 2018. In the last few years we have reflected on how to evolve our approach to credit engagement to ensure we consider the specific circumstances that exist for any given company.

One development has been to incorporate credit-related data into our research notes. This includes a figure for the bond refinancing due for a company in the coming 12 months, because an awareness of the timing and size of refinancings may provide an opportunity to intensify engagement. The aim is to speak to management when they may be most receptive to the messages we are conveying on behalf of our clients.

Ahead of engaging with a company, we may consider its credit rating and its credit default swap (CDS) spread – a measure of insuring against default on a company’s debt. One might assume that engagement should be triggered by widening CDS spreads, declining credit ratings, or share price falls. However, we believe that in most cases engagement should be long term and ongoing rather than reactive. At the same time, we acknowledge that we may need to escalate engagement on the back of a certain event, which will impact bond and equity prices.

We have also found that management teams have become more receptive to credit engagement on the whole. This is because the legitimacy of bondholders to engage on longer-term business strategy and sustainability has been strengthened by changing policy and market best practice.

Read the full article in our Q1 2024 Public Engagement Report.