Combining asset allocation and sustainability
From a sustainability perspective, all investments in the portfolios fall into two categories: those which meet environmental, social and governance (ESG) standards (Positive ESG tilt), and those considered to be providing a positive societal and environmental impact (Positive Impact).
- Positive ESG tilt: focuses on investments with better ESG quality
- Positive Impact: between 20-50% of each fund is dedicated to investments actively addressing the biggest societal and environmental challenges of our times
The portfolios as a whole are run with a climate focus, using both internal and external climate analysis tools, to ensure that we choose investments that manage their carbon emissions.
Positive ESG tilt
For the positive ESG tilt portion of each portfolio, we choose assets that reflect our allocation preferences from a closely scrutinised investment universe to make investments that demonstrate high standards of ESG behaviour.
We select assets from a wide range of asset types. They invest in, among other things, equities, government and corporate bonds, investment grade and high yield and include those from the emerging markets, currencies, green bonds and infrastructure.
The funds use quantitative screening to ensure holdings exhibit high ESG standards, by:
- Screening out companies that are in breach of the principles of the United Nations Global Compact for business and that derive their revenue from specific sectors: tobacco, alcohol, adult entertainment, gambling, thermal coal, defence and weapons
- Excluding companies that generate more than a certain percentage of their revenue from certain activities (for example, those participating in unconventional oil and gas extraction if this comprises more than 10% of revenue) Using proprietary internal, and third-party, screening of ESG-rated companies
Positive Impact
This portion of each fund is dedicated to companies and institutions that intentionally aim to make a positive impact on some of the world’s most pressing environmental and social challenges.
We identify potential impact investments via the M&G Positive Impact Framework, over six key areas:
- Climate action
- Environmental solutions
- Circular economy
- Better health
- Better work & education
- Social inclusion
These positive impact areas each reflect one or more of the 17 UN Sustainable Development Goals (SDGs)*. The SDGs capture some of the most important challenges facing the world today. They include basic ideals such as ending poverty and ensuring nobody goes hungry, as well as more complex concepts such as achieving sustainable cities and communities and ensuring responsible consumption and production.
The impact assets come from a range of asset classes including listed equities, green and social bonds, listed infrastructure or specialty funds.
*While we support the UN SDGs, we are not associated with the UN and our funds are not endorsed by them.
Our current views
Preference for equities over fixed income
Our key strategic observation is that, given historically low yield levels across asset classes, equity markets remain more attractive over the long term than fixed income exposure. Having said that, we are currently holding a slightly higher cash weighting than usual across the portfolios, in order to be able to respond to any tactical opportunities that might arise.
Inflation and rates
We believe that the current inflationary dynamic might persist into the short- and medium-term but not into the long-term. In other words, we don’t believe we are entering a new ‘high inflation’ regime. However, we do believe that the recent rise in rates could create interesting opportunities in equity markets for long term investors.
We also share the market’s view that the Fed will start tightening monetary policy this year. With more than four rate hikes already priced in, it is becoming increasingly unlikely that the Fed will be able to surprise on the upside, but this remains to be seen.
Long-term sustainability trends
We see some longer-term opportunities in sustainability trends, including renewables, circular economy and social housing. We are also finding more prospects in sustainability-linked emerging market bonds, more of which have been recently issued, and which have experienced weakness in the past few months.
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.
For financial advisers only. Not for onward distribution. No other persons should rely on any information contained within. This financial promotion is issued by M&G Securities Limited which is authorised and regulated by the Financial Conduct Authority in the UK and provides ISAs and other investment products. The company’s registered office is 10 Fenchurch Avenue, London EC3M 5AG. Registered in England and Wales. Registered Number 90776.
About Maria Municchi
Maria Municchi is fund manager on several of M&G’s Multi Asset Sustainable Investment strategies. Maria has been part of the Multi Asset fund management team since January 2017, having initially joined M&G in 2009 as an investment specialist to the Multi Asset and Convertibles teams. Before M&G, Maria worked at Barings and UBS Asset Management. She has an MSc in international management and finance, is a CFA charterholder, and has successfully completed the University of Cambridge Institute of Sustainability Leadership programme in Business Sustainability Management.
