Prudential engaging more on bonds, alternative assets
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Prudential plc is increasing its focus on climate-related engagement around its fixed income and alternative assets, as the insurance firm moves to implement its transition investing framework, which it detailed in a new paper published this week.
The Hong Kong-headquartered group sees exercising its influence as a bondholder as particularly effective in emerging markets, where it is a large investor through its operations in markets such as China, India, Indonesia and Thailand.
And, as is typical for insurers, a large chunk – slightly more than half – of Prudential’s $160.9 billion portfolio is in fixed income.
The firm has set engagement targets for decarbonising investments, and these apply to its holdings of both equities and bonds, Head of Responsible Investment Liza Jansen told AsianInvestor.
Prudential's core overarching target is to engage annually with the companies responsible for 65% of the absolute emissions in its asset portfolio.
It has also set other targets, such as linking its transition investments to executive remuneration.
“[When it comes to engagement,] we think we should be focusing a lot more on debt financing, partly because the bond market is much larger than the equity market, so companies are financing themselves more through debt than through equity,” Jansen said.
INFLUENCE IN EMERGING MARKETS
This is especially true for emerging markets, where companies tend to rely a lot more on debt than equity funding, she added.
As of June 30, global long-term fixed income issuance was $25.2 trillion, while global equity issuance stood at $422.2 billion, according to the Securities Industry and Financial Markets Association.
Global corporate bond issuance (including financials and non-financials), in particular, totalled around $5 trillion as of the end of 2023, around 25 times the amount of global equity issuance, according to the OECD’s Global Debt Report 2024, published in March.
Prudential employs the traditional stewardship approach of seeking to effect positive change through equity ownership by attending annual general meetings and voting proxies as a shareholder.
Like a growing number of institutions, however, the insurer recognises the power that debt investors can wield – an influence that is under-appreciated, Jansen said.
“You can have a lot of influence through debt financing – it's just that the timing is different,” she added.
“As an equity owner, you can continuously engage. You're always an owner, or part-owner, of the company. However, with debt, your level of influence tends to be highest when [the company needs] refinancing; when they're actively looking for money.”
ALTS-FOCUSED ENGAGEMENT
Prudential is also “looking a lot at engaging on our alternative investments right now, for our ‘financing the transition’ strategy, particularly around carbon-intensive assets,” said Jansen.
The firm does not publish its asset mix, but alternatives represent a far smaller proportion than, for instance, bonds.
“Alternative asset managers are very close to investments, so they tend to do quite a lot of engagement already,” said Jansen. “It's inherent in their strategy, because they tend to take larger stakes in fewer companies ... and may even sit on companies’ advisory boards."
As a result, investors should be asking questions about what these managers are doing and what questions they are asking companies, she added.
“They should be asking more questions on sustainability, pushing the company to disclose more and make assessments of potentially negative impacts.”
STEWARDSHIP TREND
There has been a rising focus on sustainability and ESG in private market investing in recent years, initially in private equity and real estate, but increasingly spreading to private debt and even venture capital.
Prudential worked with the Net Zero Asset Owner Alliance (NZAOA) to publish a paper giving recommendations on climate-related engagement in emerging markets in March 2023.
One of the recommendations of the document – Code Red: Call for Action on Responsible Corporate Engagement for Emerging Markets – is to start engaging through debt.
Jansen and Don Kanak, former chairman of Prudential Insurance Growth Markets, were key contributors to the paper, with Prudential leading the NZAOA's transition finance track.
The volume of guidance in this area has been growing. For instance, the Institutional Investors Group on Climate Change published guidance in June 2023 on corporate bondholder stewardship.
Meanwhile asset managers – such as AXA Investment Managers, Columbia Threadneedle and JP Morgan Asset Management – have been highlighting the importance of bondholder engagement.
But there is some way to go in this area in Asia, indicates a research paper published in May this year by Stewardship Asia Centre, part of the Temasek Trust ecosystem in Singapore.
Sustainability is seldom a board priority, shows data collated by the report across 11 Asia Pacific countries.
Only one in five boards discuss sustainability in all meetings, and knowledge of sustainability as a decision criterion for new appointments is still at best seen as a ‘good to have' in three out of five boards, it added.