Pension scheme trustees should challenge fixed income managers on their engagement activities to ensure they are taking full advantage of additional opportunities to push for more sustainable policies, AXA Investment Managers (AXA IM) has said.

AXA IM suggested that the idea that the only way for pension schemes to influence companies is by voting at shareholder meetings has long passed, arguing that those invested in fixed income are now in a “unique position” to drive change.

And with high interest rates continuing to push up demand for fixed income assets, the company argued that it is a "vital time" for pension schemes to challenge their managers, with rising yields meaning that more schemes are allocating to debt, creating additional opportunities for engagement on environmental, social and governance (ESG) issues.

“Pension schemes have a key role to play in making a better world through their fixed income allocations," Coudert stated.

"Engagement undertaken by their managers is a vital part of this. As guardians of capital, the asset management community is a vital medium whereby we can represent schemes’ interests to the issuers we invest in on their behalf to help create a more sustainable world for the benefit of their members.”

In particular, Coudert encouraged pension scheme trustees to ask how their manager is focusing on their scheme’s priority areas, emphasising that engagement requires investors to be focused and not just react to the news flow or what seems important on a particular day.

“Managers should be aiming to prioritise engagement activity based on the most relevant themes, the issuers they are invested in, and the likely impact that engagement might have on those, as well as the areas most relevant for a pension scheme’s specific sustainability goals,” he stated.

He also encouraged trustees to ask what form this engagement is taking, arguing that “ideally you want your manager to be using a blend of these methods with any particular issuer when trying to create change”.

“Outside of engagements with the issuers themselves, liaising with counterparty banks, data providers and policy makers all help to positively shape the frameworks through which fixed income markets operate,” he added.

Coudert also emphasised the need to track this engagement along a set path, encouraging trustees to ask their manager how many engagements they are taking part in, as well as clarity on when they have achieved their goals and the planned course of action if the engagement isn’t progressing.

“As a rule of thumb, you should expect it to take between 12 to 36 months for an engagement to play out," he said. "This leaves time to persuade the company of what you want to achieve and for the company to respond.”

And if this engagement is not progressing as hoped, trustees will need to know the escalation protocol, as Coudert stressed that there will be times a manager should be increasing their efforts to secure a positive outcome by escalating their efforts if they feel the engagement is not going where they want it to go.

For example, engaging higher up the corporate hierarchy or coordinating with other investors.

“Ultimately, if an issuer is unwilling or unable to change direction, there is the option of divesting," he added.

"When an investor divests, they lose the opportunity to encourage positive change, so this should really be seen as a last resort. Make sure you know your manager’s stance on this.”

In addition to this, Coudert suggested that trustees need to understand how their managers are measuring success, noting that while many managers provide engagement reports, "it's also important to ensure that your manager is including portfolio-specific metrics on the engagement undertaken and where various engagement initiatives are".

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