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Incorporating ESG and impact investment into multi-asset strategies

Investors, large and small, are increasingly keen to demonstrate greater responsibility in their investments and to commit to employing sustainable strategies. Institutional investors, such as pension schemes that are ultimately required to deliver retirement incomes, have been recognising the appeal of approaches that invest responsibly as they target attractive returns. In the same way, sustainable investing is striking a loud chord with smaller, individual investors seeking to provide for their own futures, but doing so with the welfare of the environment and wider society in mind.
Beyond ethical approaches, where the focus is on the “moral return” over the financial return, sustainable investment strategies take many forms. They may be tightly focused on specific initiatives or target outcomes, while others have a broader perspective for beneficial action.

M&G’s sustainable allocation strategy invests across the spectrum of responsible investing

Source: M&G, illustrative as at May 2019

Manifold facets of ESG analysis
ESG investing covers a range of activities which ultimately seek to influence for the better, either by reducing negative externalities, increasing positive externalities or some combination of both. We believe that exclusions and negative screens can work by helping to starve finance for negative influences. Complementing that, positive screens can help support organisations recognised to have good ESG standards relative to their peers. Both approaches have a part to play in a successful sustainable allocation process.

Integrating ESG considerations into the fundamentally-driven investment decision and undertaking active engagement represent stages in ESG investing beyond screens. ESG analysis scrutinises the ESG credentials of companies and public entities, helping to inform our investment decisions and suitability for inclusion, similar to how credit analysis addresses their financial positions and outlooks. Engagement takes that a stage further, actively working with a company to try to encourage improvement and positive action.

One aim of our ESG analysis is to identify those companies operating more sustainably and that are more easily able to adapt to a changing world where incorporating ESG behaviours is business as usual. We apply three screens to create an investable universe that is ESG-qualified.

Our first screen filters out companies in breach of the UN Global Compact principles on human rights, labour, environment and anti-corruption. The second excludes companies producing certain goods or providing services in particular undesired sectors. A third screen aims to exclude investments that have poor ESG credentials relative to their peers, by considering whether the MSCI ESG rating meets a minimum threshold of BBB for companies and BB for governments. These ratings should not be confused with credit ratings provided by rating agencies.

Assets qualifying for the investable universe will be subjected to the usual valuation analysis rigours, to determine whether they merit inclusion into our portfolio.Positive impact activities attract attention
More recently, sustainable investing has been developed further. Investors are seeking companies or funds that share their values and objectives by proactively delivering or targeting a positive environmental or societal impact. Impact strategies used to be confined to institutional or other wealthy investors through private investment, but by investing via listed equities or specialty bonds, impact also becomes available to smaller scale investors.
M&G’s positive impact equity strategy seeks to deliver attractive long-term returns by investing in a concentrated portfolio of companies that aim to deliver positive societal impacts. It combines two appealing objectives into a single strategy: attractive financial returns and measurable positive societal impact.

Our Positive Impact team undertakes the bespoke research and analysis required to assess and evaluate suitable companies. They use 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 both be assessed using this methodology, as can other instruments such as green infrastructure.

Sustainable multi-asset strategies: clear objectives, invested responsibly
M&G’s sustainable multi-asset strategy integrates the benefits of flexible and diversified asset allocation with a responsible investment approach. The asset allocation decisions are intended to be the key drivers in achieving attractive long-term total returns and we seek to achieve them while considering ESG factors. We aim for our portfolios to reflect the preferred asset allocation blend, constructed with a combination of attractively valued ESG-screened instruments and separately-evaluated positive impact assets.
This approach aims to give investors the opportunity of seeking attractive financial returns while contributing to a more sustainable society.

For Investment Professionals only. Not for onward distribution.
This article reflects M&G’s present opinions of current market conditions. They are subject to change without notice and involve a number of assumptions which may not prove valid. Past performance is not a guide to future performance. The distribution of this article does not constitute an offer or solicitation and should not be considered as investment advice or as a recommendation of any particular security, strategy or investment product. Information given in this article has been obtained from sources believed to be reliable although M&G does not accept liability for the accuracy of the contents.
M&G Investments is a business name of M&G Investment Management Limited and is used by other companies within the Prudential Group. M&G Investment Management Limited is registered in England and Wales under number 936683 with its registered office at 10 Fenchurch Avenue, London EC3M 5AG. M&G Investment Management Limited is authorised and regulated by the Financial Conduct Authority.

Maria Municchi is Multi-Asset Fund Manager at M&G Investments. This article was sponsored by M&G and RI editorial staff were not involved in the creation of this content.