Engaging with Issuers

As an active, bottom-up, fixed income asset manager, PGIM Fixed Income views active stewardship as a fundamental part of our investment process. Through constructive and ongoing dialogue with issuers, we believe that ESG engagements can enable us to achieve better investment outcomes and, where applicable, positive environmental and/or societal outcomes for our clients.

FOCUS

Our engagement efforts are rooted in our fiduciary duty towards our clients. As such, our engagements focus on issuers where we believe that an engagement will be additive to our investment process. The objective of our engagements will be specific to each issuer and focused on issues that the relevant analyst considers to be material to the issuer from an ESG credit risk/opportunities and/or ESG impact perspective.

A core tenet of our engagement philosophy is that we should not pursue engagements that are likely to harm the value of our clients’ positions in the issuer. While we cannot know with certainty what the effect of an engagement will be in advance, we prioritise engagements and objectives that our analysts believe (based on their knowledge of the issuer and its industry) will preserve or improve the value of our positions in the issuer and avoid those that they believe will conflict with this intention.

Our engagements are focussed on issuers of debt and include listed and unlisted companies as well as securitised products, municipals, and sovereigns.

PRIORITISATION

We prioritise our efforts on engagements that we believe will add the most value to our investment process. This generally means prioritising engagements with issuers where:

• we have identified a material issue that is impacting or could impact the issuer;
• we find the issuer to be attractive from a relative value perspective; or
• we believe the issuer is likely to be receptive to engagement

However, as an active manager we may engage with other issuers as circumstances warrant.

APPROACH

Our approach to engagement is rooted in constructive dialogue with issuers, internal collaboration between fundamental research analysts, economists and ESG specialists, and quality engagements over quantity.

Given that our engagement activities are directly linked to our investment research and decisions, our strong preference is for one-on-one direct engagements, as this allows us to represent our own viewpoint and enables us to speak candidly when highlighting our ESG concerns to company management, policymakers, arranging banks, sponsors, NGOs or any other stakeholder. We do not employ third parties to conduct engagements.

To facilitate constructive discussions and leverage PGIM Fixed Income’s robust research capabilities, our engagement approach is fundamentally bottom-up. We will engage when an analyst identifies what they consider to be a material issue, they believe could benefit from communication with the issuer. The engagement aims to offer valuable insights into the issuer's capability and readiness to address the issue, as well as inform our investment perspective of the issuer. Such material issues could either be issues that we have identified through research or be specific event-driven. We believe that engagements should be dialogues that are informative and meaningful to both parties. This means, that while dialogue will often entail our analysts probing management on relevant, material ESG issues and assessing an issuer’s plans to address them, we also believe in sharing – where practical – how the information from our dialogue is used in investment decision making, and how this may vary across strategies due to clients’ differing sensitivities to risks and impacts.

While our engagements are inherently bottom-up, we may also organise certain engagements around thematic research priorities, which we deem to be material across one or more sectors from either a credit or an impact perspective. To inform our views on these thematic priorities, we may engage with issuers excelling in these areas to learn how they have overcome challenges and instituted best practices. In turn, we may also engage with issuers in the same industry to share some of these findings.

Furthermore, our proprietary ESG Impact Ratings¹ can offer additional tangibility and context across our engagements. These ratings are assigned to all issuers in our standard coverage universe and assess negative and positive impacts of issuers on the environment and society. They are therefore used to determine an issuer’s eligibility in many of our ESG strategies. As such, they can be helpful in engagements, as they allow our analysts to discuss with issuers how we rate them on ESG impacts for the subset of our accounts that include an impact lens, while also providing the rationale and factors behind the ratings.

Irrespective of the topic or rationale for our engagement, our approach to engagement emphasizes quality over quantity. This means that our focus is on fewer but more substantive engagements, where the objective is centered on one or two in-depth questions or recommendations.  

This also means that we encourage close collaboration between our team of fundamental research analysts, economists and ESG specialists throughout the engagement process. Such collaboration allows for knowledge sharing between teams and enables us to think holistically about the ESG objectives and risk-return implications of an engagement. Given that we see engagements as a part of our investment process, we see great value in this collaboration across teams.

Once a meaningful engagement has taken place, a summary and assessment of the engagement is recorded in an internal cloud-based tool, which can be accessed by portfolio managers, credit analysts and other authorised users within PGIM Fixed Income. These write-ups facilitate monitoring of our ESG-related interactions with issuers, provide helpful insights to our investment process and are used to inform clients of our engagement efforts. The insight from the engagements are reflected in our ESG Impact Ratings and/or fundamental credit ratings, as appropriate, both of which must be updated at least annually, or more frequently as events warrant.

ESCALATION

We believe our most effective escalation tool is our decision to reduce holdings or refrain from investing in the issuer’s debt in accounts where this would be in line with a client’s guidelines and as permitted by law, especially when combined with direct feedback to the issuer about our investment decision.

Where we learn through engagement that the issuer is not addressing issues that affect our assessment of its credit profile or outlook, it may alter our perception of the issuer's relative value. As such, if we feel the added risk is not adequately compensated for, our escalation might involve reducing holdings across various strategies.

Separately, if we lose confidence that the issuer is addressing its most significant ESG impacts (which are not always credit-material), the escalation action will typically be reflected by a downgrading of the ESG Impact Rating. Such downgrades are significant, as they can lead to reducing or exiting positions in ESG strategies with explicit ESG Impact Rating rules.

Since we generally lack equity ownership rights, we cannot use proxy voting—a key escalation tool for equity holders. However, as a leading fixed income asset manager, we have effective mechanisms at our disposal. Unlike equity, debt has maturity dates, requiring issuers to frequently raise new debt. Even if we don’t currently hold an issuer, our insights can still impact future debt issuances. Considering these factors, our decisions to buy, divest, or refrain from investing in relevant accounts can be useful escalation tools, particularly when accompanied by direct communication to the issuer about our investment reasoning.

ENGAGEMENT WITH POLICYMAKERS AND REGULATORS

As a large, global asset manager, PGIM Fixed Income is affected by regulation in many jurisdictions, both where this applies to issuers and investors. As we do with all public policy matters that impact our business and our clients, we actively engage with policymakers, either directly or via collaboration with other PGIM businesses at the PGIM level (and, at times, via our trade association partners). We also engage with policymakers on proposals that may negatively impact our investments to make sure they understand the implications of their actions on both the economy and our investors.

ENGAGEMENT WITH INDUSTRY ORGANISATIONS

While the majority of our engagements with issuers are done bilaterally, collaboration across the industry is another important aspect of good stewardship. The pooling of resources by investors through collaborative initiatives enables the sharing of a breadth of insights and expertise on ESG-related topics, as well as the sharing of best practices around the world. It enables investors to focus on areas of consistency, and can add weight and emphasis to the issues of common concern while enhancing the likelihood of catalysing a positive, value-enhancing change in the market. Many ESG industry initiatives exist worldwide, often with broad remits. On an annual basis, each of PGIM  and PGIM Fixed Income carefully reviews the ESG initiatives in which it participates to ensure we play an active role in organisations that we believe will benefit our investment process, and to which we are able to make a positive contribution.  We are also careful to join initiatives only if we believe they closely align with the principles of this engagement policy, including (among other things) a focus on quality over quantity and constructive dialogue based on thoughtful research. Examples of our current memberships in collaborative initiatives related to ESG topics is below:

Directly as PGIM Fixed Income

• Signatory to the UN Principles for Responsible Investment (UN PRI) (Securitised Products Advisory Committee)
• Signatory to the Financial Reporting Council’s UK Stewardship Code
• Partnership for Carbon Accounting Financials (PCAF)
• Partnership for Biodiversity Accounting Financials (PBAF)
• Climate Bonds Initiative
• Center for Real Estate Finance Council (CREFC) (Sustainability Steering Committee, Transparency Subcommittee)
• European Leveraged Finance Association (ELFA) (ESG Committee)
• Structured Finance Association (SFA) (Auto ABS Working Group, CMBS Working Group, ESG Task Force Steering Committee, Structured Finance Disclosure Framework Working Group)
• Signatory to Access to Medicine Foundation
• Emerging Markets Investor Alliance (EMIA)
• The FAIRR Initiative (FAIRR)
• Loan Syndications and Trading Association (LSTA)
• Association for Financial Markets in Europe (AFME)
• Loan Market Association (LMA)

Indirectly via PGIM

• The Council of Institutional Investors (CII)
• International Corporate Governance Council (ICGN)
• The Institutional Investors Group on Climate Change (IIGCC)
• International Financial Reporting Standards (IFRS) Sustainability Alliance

Research Funding Partner of Transition Pathway Initiative (TPI)

 

¹ ESG Impact Ratings are proprietary internal ratings designed to assess issuers’ environmental and social impacts, rather than risk. They are applied, to the extent permitted by applicable law, to certain portfolios whose investors have expressed an explicit double-materiality objective. More information can be found here.