Ben Constable-Maxwell, Head of Impact Investing at M&G Investments, is one of the driving forces behind the move to integrate ESG, sustainability and impact investing into fund and portfolio management decisions. In this Q&A, he talks to Sue Whitbread, Editor at IFA Magazine, about how and why ESG integration and impact investing are underpinning successful investment strategies for the future
IFAM: Why should advisers be interested in ESG?
BCM: There are a number of compelling reasons! It is widely accepted that environmental, social and governance factors (ESG) could have a material impact on long-term investment outcomes. Understanding ESG issues – both risks and opportunities – is therefore fundamental to accurately interpreting long-term risk and return.
Advisers also have a responsibility to understand how their clients’ investments are being managed in ESG terms and to use that to hold fund managers to account. For example, there is an important distinction to be made between ESG integration – the explicit and systematic inclusion of ESG factors in investment analysis and investment decisions, where these are meaningful to risk and potential return – and investment products that have an explicit sustainability or impact-related goal. Advisors can play a hugely important role in helping their clients to build this understanding.
There is then investment performance to consider. We believe incorporating ESG factors improves the investment decision-making process and can lead to better risk-adjusted financial outcomes for investors.
Finally, there is client interest. A growing number of investors are focused on social and environmental issues and are interested in how their investments relate to them. It is important today that advisers are prepared to discuss this with their clients, and can introduce them to suitable products, whether the desired focus is on ESG primarily for risk management purposes or whether they want to put their investments to work in a sustainable or impactful way. We think this dialogue can further build the relationship between advisors and their clients.
IFAM: What do you see as the driving factors behind the shape of the ESG landscape this year?
BCM: New regulations will continue to push companies and asset managers to disclose more information. In Europe, Sustainable Finance Disclosure Regulation (SFDR) came into effect in March 2021 and will lead to enhanced disclosure by asset managers that promote sustainable investment funds. The aim is to increase transparency and comparability for investors, which can only be a good thing.
There is also the UN Climate Change Conference (COP26) coming up in November 2021. I expect this event, which is being hosted in Glasgow, to intensify the focus on climate change as an urgent risk and on how investors and companies are managing their exposure to – and addressing – that risk.
Alongside the focus on climate change, rising awareness of the other systemic environmental challenge, biodiversity loss, will inevitably accelerate in 2021. As yet this has not received the attention that Climate has but that is changing.
Then there is the ongoing pandemic, of course. In 2020, COVID-19 increased awareness of wide-ranging societal risks in investors’ minds, from public health to social inclusion, and this will continue this year.
And the issue of diversity will continue to shape the ESG landscape as we go through this year. Importantly, I think investors’ focus will expand beyond gender to other aspects of diversity.
IFAM: M&G has been a long-standing exponent of ESG and impact investing. You have the specific focus funds but how does this approach permeate more broadly through M&G’s fund range and different asset classes in which you invest?
BCM: We should start by trying to distinguish between these terms – of ESG and Impact Investing. They are linked but distinct. All our investment strategies are committed to integrating ESG with the aim to deliver improved long-term outcomes for our funds and our clients. This process has been ongoing for some time, certainly accelerating in recent years. Sustainability and Impact investing are further up the curve, recognising not just the effect of ESG/sustainability issues on our investments but also that our investments could have an impact on real-world social and environmental challenges and outcomes.
Some think of ESG as being an ‘outwards-in’ approach, that it’s about how external ESG factors affect our investments, very much linked to our fiduciary duties. Impact investing is the other way round almost – more of an inwards-out effect. It’s about focusing on how our investments affect the outcome of major societal challenges, as well as aiming to deliver an investment return.
More and more of this latter perspective is influencing mainstream investing. Investors are thinking about the broader impact of their investments as well as developing dedicated impact investing strategies. This is the direction of travel for M&G and hopefully for our industry too.
As these developments accelerate, we need to be clear about definitions and distinctions. Our impact funds have an explicit and dual objective to deliver investment returns but also to generate social and environmental impacts. The big background risk is that investors greenwash or impact wash or overclaim about what they do. So whilst we are mindful about the value of moving towards a greater focus on impact across all our investments, we need to be clear to our clients about each fund’s mandate and objective and what outcomes they are designed to achieve, thereby minimising this risk of overpromising or overclaiming.
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