Outcomes and opportunities for sustainable multi-asset investing in the aftermath of COP26

5 min read 8 Feb 22

Summary: M&G Investments’ Maria Municchi talks to IFA Magazine about the outcomes of the COP26 climate change conference and how she believes that a sustainable multi- asset investment strategy is well set to capitalise on the opportunities presented.  

IFAM: It seems that the UN's COP26 climate change conference at the end of last year has sparked interest and raised awareness about sustainability right across the board. What do you see have been the key takeaways and opportunities arising from COP26?  

MM: COP26 has been very much talked about and covered by news channels which has brought a lot of focus to it. It is a very important event because it brings together many countries to discuss the advancements being made in the fight against climate change, but also what could be the next steps, the next areas to focus on. The outcomes of COP26 have often been described as ‘mixed’, but that often happens in such instances. It’s because the transition towards a lower carbon economy and the fight against climate change are very much an evolving process. We're very far from achieving these goals. 

However, I think there are some very positive elements that have come out of COP26. In particular, it has helped to focus people’s minds onto some specific areas that are crucial  if we are to achieve and limit the global temperature increase to below 2 degrees - and ideally 1.5 degrees - centigrade. 

I would describe its key achievements across three categories: 

1. The energy mix 

There were some important focus areas on this subject which emerged during COP26. The first of these was the emphasis on coal. Coal is responsible for a very large amount of global carbon emissions on an annual basis and is therefore a key element in the fight against climate change. At COP 26, it was hugely important that coal was named and identified as one of the key areas of action required. We have seen a very strong pledge and commitment to phase down the use of coal. Specifically countries agreed to reduce the amount of coal used for production of electricity and therefore to switch towards a different source, mainly renewable source, in order to reduce overall carbon emissions. 

Another important area was the focus on methane, another greenhouse gas that is less talked about than CO2. However, it is still very important in terms of its impact on warming. The difference with CO2 is that methane tends to last in the atmosphere for a much shorter period of time. Therefore, on a longer term perspective, it is a bit easier to control. However, global temperatures are already increasing. Recent reports have demonstrated that the last seven years have been some of the warmest on record since 1850. Because of this it's very important also to take into account what the short term effects of methane could be in global warming.  It is very interesting how this has become also a very key point for COP26 with ambitions to reduce the emission of methane as well. 

Those are two very important elements concerning the energy mix. They have some very important implications for not only energy providers, utilities and the fossil fuel industry, but also broadly for all industries. That’s because we all use energy, and so the way this energy is produced affects every economy. It will be very important in the years ahead. 

2. The environment 

In this area of focus we have seen some very important achievements, around the commitment for stopping deforestation and reversing parts of it by 2030. This is extremely important because biodiversity, the ecosystems of forests in particular, which are at the centre of this pledge are a key carbon sink. In other words, they're able to absorb part of the CO2 emissions that we input into the atmosphere.  In order to be able to achieve the target of a net zero and lower carbon economy over the long term, they play an incredibly important role. Being able to protect and enhance our forests is crucial. Forests are also crucial to maintaining ecosystems in place, which are also very important in regulating climate, but also shorter-term weather events. 

These are all very important and I think a very good outcome from COP26 is this renewed focus on the environment and deforestation in particular. 

I’d also point out another area of interest around net zero transportation, in particular around vehicles. Of course, we know the importance that this could have for the automobile industry, but also more broadly for our societies. 

3. Global finance as an enabler 

Finally, the third area to highlight that will continue to be extremely important is around financing. We know that this vast transformation which is needed and the ambitions of different countries around the world towards a low carbon economy require financing. It also requires changing the way we invest today: in particular, moving financing from certain sectors and areas to others. 

There have been some important commitments coming from COP26 across the private financial sector.  In addition, there has also been an increase  in financing for emerging markets countries. These countries are very often in a different position from developed countries. Over the years, developed nations have been able to reduce carbon emissions by outsourcing some of their impacts to other countries around the globe. It's very important that we take action in a global sense to be able to achieve those objectives. It's one planet and we all have to co-exist on it together. 

Those are some of the positive and negative outputs from COP26 which I’ve taken away.  Although clearly there is room for improvement, the fact that so many countries got together to discuss this topic and strategies to deal with it is extremely important for what is facing us in coming years. 

IFAM: Looking ahead, with so many opportunities in the sustainable investment space,  where do you see some of the strongest investment opportunities appearing at the moment? 

MM: The industry observations around sustainability and sustainable investing have been very important in the past few years. It’s really gone from a niche area of financial markets and investing to a much more broad-based approach. We've seen it growing not only in terms of the assets under management, but also in terms of the opportunities that are present in the market. 

If we think, for example, about the sustainable debt markets that have been growing very significantly in the past few years, providing investors with new opportunities to access financing towards green projects or a special project or transition of certain companies. We have seen quite a significant transformation.

It’s really important and also links back to COP26. We have these objectives and targets which are obviously not easy to achieve because our economies and societies are very interconnected. It's by no means a simple task to achieve a reduction in carbon emissions when these carbon emissions are spread across the entire globe. But as we've seen in COP26, there has been an increased focus on the different elements of our economies and societies as I’ve mentioned some of these such as coal, methane, forests and reforestation to overcome deforestation for example. As countries start to discuss more actively the ways to achieve these specific targets, then I think this really accelerates the process of putting regulation into practice. It could therefore mean that these changes might be brought about in a way that possibly could be faster than some market players today anticipate. 

This is also driven by the way in which the latest scientific reading evidence shows us that we are already seeing this level of temperature increase. To me, one of the key surprises could be the speed to which this transformation towards sustainability and towards a low carbon economy might occur. 

This means two things.   

Firstly, that companies which create and provide solutions and enable this transition are very well positioned to be able to benefit from this change. 

On the one hand, all companies across different industries will be affected, It is therefore  important for us to identify those companies that have already done their homework when it comes to sustainability. They want to be ready and have looked at what their issues are in terms of carbon emissions. They will have already set up a plan to reduce those over time and they will have already embedded this way of thinking and these trajectories into their future strategies. This creates a different type of opportunity.

On the other hand there are those companies that are really at the forefront of this change.  These are companies that, for example, continue to innovate when it comes to their renewable energy sources. If we think about solar panels for example, we've seen an incredible level of innovation in the past 10 years. However, we know that many companies are still working on increasing this innovation and making solar panels even more efficient. 

We've also seen companies continue to increase efficiency around onshore and offshore wind farms. There are still some gains to come from an innovation perspective, for those companies that dedicate and invest in R&D in those areas. 

On the other hand, looking across different industries, across different countries, it's very important to be able to identify those companies that already have a plan to face these changes that we're heading towards because that will put them in a much better position relative to their competitors. 

IFAM: How do you and your team actually go about constructing sustainable multi-asset portfolios given all those opportunities that are out there? How do the asset allocation and stock selection processes work? 

MM:   Here at M&G, we have been delivering multi-asset investments for our clients for many decades. 

We have built a robust approach that combines strategic and tactical asset allocation.  This means that we will look at what are the medium to long term opportunities and then we position our portfolios accordingly. Of course, we also consider what are the risk return profiles of our investors so we run different types of portfolios according to demand and expectation, for example, from a volatility standpoint. 

In addition to this, we also aim to take advantage of shorter term market moves - or tactical asset allocation - which we identify through assessments of investment psychology. We look at some of the most important price moves in the market, assessing them against what the market narrative is and what investors believe and psychology is at that point in time. We have seen over and over again that this provides us with many interesting and valuable opportunities. 

From a sustainability standpoint, our sustainable multi asset strategies have two types of holdings: (1) Positive Impact holdings and (2) Positive ESG Tilt holdings. Our Positive Impact holdings are investments actively addressing the biggest societal and environmental challenges of our times. We have used the UN Sustainable Goals to help design a framework targeting 6 key areas of positive impact: climate action, environmental solutions, circular economy, better health, better work & education, and social inclusion. The “Positive ESG Tilt” holdings focus on investments with better ESG quality based on MSCI ESG scores and integrating M&G ESG scores when available. Needless to say, these funds also have various hard sector exclusions such as tobacco, gambling and controversial weapons.  

Finally, we think it is very important to report transparently on the Positive Impact that our investments have had, which why we publish an annual ESG & Impact report highlighting the key sustainability and impact KPIs for each of our sustainable portfolios !

 

While we support the UN SDGs, we are not associated with the UN and our funds are not endorsed by them.

The value of investments will fluctuate, which will cause fund prices to fall as well as rise and investors may not get back the original amount invested.

Past performance is not a guide to future performance. The views expressed in this document should not be taken as a recommendation, advice or forecast

By Maria Municchi

Related insights