Sustainability within multi-asset strategies

10 min read 8 Jun 21

Summary: M&G Investments’ Maria Municchi talks to Wealth DFM about balancing sustainability and ESG requirements with the need for financial returns within multi-asset portfolios

Wealth DFM: Maria, how reliant are you on third parties to help you to make judgement on the ESG credentials of companies you are researching? And how much does qualitative work complement this initial screening process within multi-asset strategies?

MM: Over the last few years we have seen an incredible evolution of the third party data available to fund managers. This goes from the governance side to the social and the environmental, which is another area that has seen an incredible amount of growth in terms of data availability and data type.

If you think about all the third party research that is present in the market today, we're definitely seeing a level of consolidation. The way I see it is that we're still seeing some differences across third parties and the way they construct their ESG ratings or scores. This is fine as long as, as fund managers, we understand the methodology and what the difference is across the range of providers. 

The benefits of using a third party are that the coverage it gives us is really large. For multi-asset investors like us for example, which operate across different asset classes, it can be quite beneficial to have an initial coverage like this which is so broad. It enables us to cover all the different indices, different markets and different asset classes.  Then we need to look into the detail of the ESG characteristics, to really look under the bonnet. 

First of all, it's key to understand the methodology and how this differs across the range of third parties. Also when needed, to dive into some of the key issues that these ratings might have identified and try to understand how the companies respond to that. Sometimes we use these as ideas for engagement with the company to try to find out more about some of the ESG issues that the ratings or scores might have identified. 

Finally, there is an area of our portfolios in particular that is dedicated to positive impact assets. This is an area where we're looking not only to deliver investment returns, but also to achieve some sustainability outcomes being environmental or social. In this part of the portfolio, our ESG analysis becomes a lot more qualitative. 

We would use the third party very much as a starting point here. But then we go into the details of these ratings and scores and using different sources of information to actually validate what the ESG characteristics of these investments actually are. This is because we're not only trying to achieve a financial return, but we're also trying to achieve different sorts of outcome as part of this core part of the portfolio. It tends to represent between 20% and 50% of our overall portfolio of our sustainable multi-asset strategies. 

Wealth DFM: As an active fund manager, could you give us some examples of how and where you engage with corporates within the portfolios? 

MM: I believe in engagement and in general, stewardship and active ownership. It's a very important aspect of active management and it’s becoming more and more important for integration of ESG investing. 

The way we approach this is that we will tend to identify some key environmental, social and governance issues that we decide to engage with. In those areas, we talk with the companies more directly to try to identify their way of dealing with some of those issues and challenges. It's almost like a two way process, where we learn from them and they learn from what we would demand, as investors, from them going forward. 

Engagement can also take place at different levels. You can have engagement at the fund level directly or at company level. For example, some businesses we engage with at the fund manager level, but also you can have engagement more broadly at the company level, so as M&G as a whole. Also there can be engagement across different asset managers. So following initiatives like Climate Action 100+, those are types of engagement where asset managers get together and work together to achieve some clear objectives with the companies. 

As to some of the companies in our portfolios in particular, I think there are a couple of interesting examples we can talk about here.  

One is an engagement that has been done at the M&G level, which is with Sainsbury. It has been very much focused on modern slavery and trying to understand how this company deals with the issues around supply chain and the challenges of potentially modern slavery appearing across the supply chain. They've put together a very interesting programme that we want to explore further and that we think could be quite interesting for the industry at large to continue to evolve in monitoring these risks and to move forward on this. 

Another example that is more fund specific and relates to what we have in the portfolio regards green bonds. As part of our sustainable multi-asset strategies, we will also consider investing in green bonds as part of our positive impact exposure of the portfolio.  Again, it’s an area of the portfolio where we're trying not only to achieve financial returns, but also to get some sustainability outcomes. 

For the green bonds in particular, those are obviously environmental in nature. So we will look at things like CO2 emissions reduction, as well as the number of trees planted for reforestation etc. We look at a range of different metrics that are linked to environmental sustainability.  

Often with green bonds issuers, we get in touch with the company trying to understand more about what are they using the proceeds for. Normally green bonds are debt that is issued with particular projects in mind.  We like to have as much visibility as possible of their use of proceeds. 

Many companies are advanced in the sense that they release annual reports that explain how the proceeds have been used for the specific year. Of course, those have already been set at issuance, but this provides us with the transparency of how these proceeds have actually been used. 

One interesting discussion we had recently with the company where we own the Fibria green bond; Fibria is now owned by Suzano papel, the largest pulp and paper company in Latin America. which is an area that is quite challenging.  Also, from an environmental perspective, you need to follow really strong and very high level standards. One aspect that the company has been trying to push forward is sustainable forestry. Some of the proceeds of these bonds, for example, are being used to purchase wood that is certified from sustainable forestry. We had some questions around that because we were wondering, how it was contributing to the overall company sustainability, which we think is relatively high and they have some good plans ahead. But they the answers we got were quite interesting.  That was because it was talking about how purchasing sustainable forestry wood was also incentivising the supply chain to move in that direction. Again, it shows how it is so interesting to talk to companies to try and understand more about how ESG is perceived and more in general, how they think about this sustainability strategy and how they can also influence the rest of the industry by doing so. 

Wealth DFM:  Do you invest in funds or do the funds just invest directly? 

MM: The majority are direct holdings. We typically invest in single equities, corporate bonds, sovereign bonds, bonds issued by supra-national bodies like development banks. This enables us to have very clear visibility of what we are investing in and some very clear standards in terms of, for example, exclusions. 

There are a number of exclusions that we follow. We won’t invest in companies that are, for example, in breach of the United Nations Global Compact Principles. We wouldn’t  invest in companies that operate in certain sectors or services, and we require a certain level of standard from a governance and ESG perspective. 

Going direct gives us the opportunity to be very granular on this. It also gives us the opportunity to vote at every AGM of the companies that we own in the portfolio. So we can really be active investors and when we feel there is a need for engaging with those companies, we can go directly to them. 

There's also been a benefit from a cost perspective, of course, because going direct is more cost efficient than owning a collective instrument like a fund or an ETF. 

However the key reason why we do it is really about giving us the granularity, the ability to get direct exposure to certain themes, certain areas of the market, while having a full visibility of what it is that we're investing in. 

Wealth DFM:  And finally, sustainable investing is clearly something which you feel very strongly about. What excites you most about it? 

MM: It’s very interesting how the focus on ESG and sustainability has grown in the last three years, since we first launched our first sustainable multi-asset strategy. It has been quite surprising to some extent to see the relevance and importance with which this topic has been taken up by the market. 

I think there has been an initial approach that has been very much about trying to highlight what the risks are about ESG, what the risks are about not investing sustainably. To me, what is particularly appealing today is to consider what are the opportunities? 

If we look more broadly at why are we talking about these issues, why are they relevant today, I think it's clear that we can see a very important transformation that's been taking place at the macro level. We can look at how countries are behaving, how our regulation is changing and even the most recent fiscal and monetary policies are pointing in the direction of transformation and becoming more sustainable. 

So with this in mind, I think what will be very exciting from an investment standpoint going forward is really trying to capture some of the opportunities that this transformation will bring. Not all of them will be obvious. I don't think that by having a quick selection of high quality ESG companies, you're guaranteed to win. 

I think it is much more about trying to understand some of the broader themes that are happening around us and in what part of the market. Also what companies that we're looking at can benefit the most from this and can move faster and change better to be able to become more efficient and therefore deliver better returns for the clients as well. It's a very interesting challenge, and one which I believe has some excellent opportunities and prospects ahead. 

The views expressed in this document should not be taken as a recommendation, advice or forecast.

When you're deciding how to invest, it's important to remember that the value of investments goes up and down. So how much your investments are worth will fluctuate over time, and you may get back less than the original amount you invested.

By Maria Municchi

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

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