M&G: Sustainable investing in multi-asset and equity strategies

6 Aug 2019

Maria Municchi, a fund manager who is part of M&G Investments’ multi asset and positive impact teams

Investors increasingly want to embrace and demonstrate greater responsibility in their investment strategies. Whether it’s large pension schemes looking to deliver retirement incomes or individuals investing for their future, there is an increasing attraction to approaches that target attractive returns while investing responsibly or sustainably.

Responsible investing comes in different forms: for example, ethical investing, ESG (environmental, social and governance) considerations or impact investment. It is important to understand how they differ and how each can be captured in the main asset classes, such as equities and bonds.

Ethical approaches usually centre on company or sector exclusions. They are based on an investor’s underlying beliefs and might range from nuclear power to animal welfare.

Applying ESG in different ways

ESG investing covers a range of activities, from applying negative or positive screens to filtering investments to fundamental analysis and engaging with companies. Screens may focus on whether companies meet certain qualifying characteristics or subscribe to particular third-party principles, or on how their ESG standards compare to sector peers.

Fundamental analysis in ESG may relate to how a company operates, how it uses resources, treats its workers or customers, or how transparent it is in its reporting and dealings. Engagement takes that a stage further and works with companies to encourage improvement and positive action.

The aim is to identify companies operating more sustainably and can adapt to a changing world where incorporating ESG behaviours is business as usual.

Proactive approach of positive impact

More recently, sustainable investing has been developed to give consideration to the positive impact an investment is expected to make. Impact investing typically combines two appealing objectives into a single strategy: attractive financial returns and measurable positive societal impact. Impact strategies were once confined to institutional or other wealthy investors through private investment, but by investing via listed equities, impact has become available to smaller investors.

Our positive impact team assesses investment candidates using a three-factor approach known as iii-analysis. The quality and viability of each potential investment is scrutinised alongside the declared impactful intentions (and practices) of the business and the materiality of the impact its activities have in a number of social and environmental categories, mapped against the UN Sustainable Development Goals (SDGs).

Equities and bonds may be assessed using this methodology, as can other, less-well known instruments such as green bonds and green infrastructure.

One of M&G’s sustainable equity approaches – our positive impact strategy – seeks to deliver attractive long-term returns by investing in a concentrated portfolio of companies that aim to deliver positive societal impacts.

Sustainable multi-asset strategies seeking multiple objectives

M&G’s sustainable multi-asset approach integrates the benefits of flexible and diversified asset allocation with a responsible investment approach aiming to deliver attractive long-term total returns, while considering environmental, social and governance factors.

We apply three ESG screens. The first filters out companies in breach of the UN Global Compact principles on human rights, labour, environment and anti-corruption.

Second, companies producing goods or providing services in certain sectors, namely tobacco, alcohol, controversial weapons, gambling, pornography and thermal coal are excluded.

The third screen considers the ESG rating, attributed by MSCI, to a company or government, and whether it meets a minimum threshold. Not to be confused with credit ratings, we will exclude companies with an ESG rating lower than BBB and governments below BB.

The ESG-screened assets within the strategy are combined with dedicated positive impact assets that we expect to deliver towards achieving the UN SDGs. This approach gives investors the opportunity of seeking attractive financial returns while contributing to a more sustainable society.

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