Sustainability within 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.

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