I wrote a piece a few years ago on PruFunds and ESG (Environmental, Social and Governance). In the article I wasn’t trying to badge PruFund as an ESG solution, merely pointing out that the investment teams across M&G had been focusing on good stewardship and responsible investing for many years and there was ample evidence of this.
A lot has happened in recent years, and we hope readers will see good progress has been made in many areas, but we acknowledge there is still work to do.
At a high-level sustainability is now very much at the heart of M&G’s strategy and the group 10-point plan ensures that the subject permeates through every facet of what we do on a day-to-day basis, not just how we invest.
The full M&G Sustainability report can be accessed here;
I’m sure many readers will know the more you delve into the themes of ESG, sustainability and impact etc. they become very complex and nuanced, further complicated by there being no agreed industry wide definition of what each means.
The COP26 Summit in Glasgow is going to place the E in ESG at the forefront of everyone’s’ minds and many column inches will be written about the event. The S and G are also crucially important and good stewardship and responsible investing plays a role across the spectrum of ESG.
I want to talk about stewardship and responsible investing from the perspective of the Prudential multi asset portfolios, like PruFunds and what it means day to day and how it continues to be embedded across the work we do within the M&G Treasury and Investment Office (T&IO). The work done across M&G Investments is also crucially important as they run a large proportion of the underlying funds and mandates.
Two key companies
When talking about the investments that underpin PruFunds there are two key entities within M&G plc, Prudential Assurance Company (PAC), which is an Asset Owner and M&G Investments (M&G), the Asset Manager.
The term Asset Owner may be new to some, but it is important that a clear distinction is made between the roles and responsibilities of PAC and M&G. You may also be asking where T&IO fit in to this? PAC effectively delegates authority to T&IO to carry out investment activity on their behalf, hence the references to T&IO throughout this article.
Numerous external Asset Managers are also employed to run assets within PAC multi asset portfolios but the focus here is M&G.
What is an Asset Owner?
They are large institutional investors like pension schemes, insurers, endowments, local government pension pools and sovereign wealth funds. The investment philosophy that underpins each type of Asset Owner can vary widely, depending on what liabilities they need to manage and their investment timeframe. For example, a US endowment fund has a very long-term investment horizon and they generally invest a much higher proportion in risk and alternative assets whereas as a life insurance company will hold predominantly fixed income assets to match long-term liabilities.
What are the roles of the Asset Owner and Asset Manager in PruFunds?
Each works closely together but have very different roles and responsibilities and indeed different ESG policies and Stewardship reports that reflect this.
At a high-level T&IO (on behalf of PAC) are responsible for setting the investment strategy for each PruFund and monitoring portfolios on a day-to-day basis. They also select and monitor the underlying managers that effectively put client’s money into markets.
M&G then have the responsibility of physically investing client money across many different asset classes in public and private markets. They are also responsible for engagement with underlying investee companies. This will include voting, meeting with company execs and collaborating with other asset managers in areas like climate change. A forum like Climate Action 100, of which M&G is a member, can leverage of the influence of dozens of very large investors to actively engage and influence positive change with some of the largest companies.
T&IO require all active investment managers to engage with and influence investee companies on their behalf. The aim is to achieve more sustainable business models and change behaviour where appropriate. T&IO also expects all investment managers to report on the results of their engagement strategy.
What evidence can we provide?
To help evidence how this works in action I thought it would be useful to reference the work done to become a signatory to the UK Stewardship Code 2020.
What is the UK Stewardship Code 2020?
The UK Stewardship Code 2020 sets high stewardship standards for those investing money on behalf of UK savers and pensioners, and those that support them. Stewardship is the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society*.
The Code applies to Asset Owners, Asset Managers and Service Providers (e.g., investment consultants). Full submissions can be accessed here;
The Code has 12 principles;
Source: Financial Reporting Council 2019
For this article I will just draw out a couple of examples as to what each means from a PAC and M&G perspective;
For Principle 2, both organisations need to evidence robust but separate governance structures with key roles clearly defined and appropriate decision-making processes in place.
Principle 9 draws out the key differences around engagement. The role of T&IO is to fully understand and monitor the engagement activity of M&G (and all other active managers), including voting.
The M&G Stewardship & Sustainability team provide issuer and sector specific ESG risk and opportunity analysis and education on sustainability themes to portfolio managers and analysts. They also lead on company engagement across asset classes.
What else has evolved within T&IO?
From a PruFund perspective it is also important to highlight two key parts of the investment process where ESG considerations are now more embedded.
ESG factors form part of how the overarching investment strategy for each PruFund is decided through the strategic asset allocation process and the T&IO Manager Oversight team have continued to build ESG considerations into their manager selection and review process.
Net-Zero Asset Owners Alliance (NZAOA) / United Nations Principles for Responsible Investment (UNPRI)
‘On behalf of over £120 billion of assets held by PAC for its policyholders and savers, M&G plc has also joined the UN-convened Net Zero Asset Owners Alliance (NZAOA), the global institutional investor group acting to help limit global warming to 1.5 degrees in line with the Paris Agreement.
To provide transparency on how PAC is delivering on its climate commitments, it has also become a signatory of the PRI (Principles for Responsible Investment), the UN-backed organisation promoting the integration of environmental, social and governance (ESG) factors in asset ownership decisions. PAC’s responsible investment activities will be assessed by PRI annually from 2023. M&G Investments, the asset management arm of M&G plc, became a signatory of UN PRI in 2013 and is currently rated A+ and A across the nine categories in which it is assessed.’
Full press release here; M&G plc joins Race to Zero – M&G plc (mandgplc.com)
The subject of ESG, of which stewardship and responsible investing is a part, is incredibly diverse and complex. It is further complicated by the sheer number of organisations operating in different areas with different aims and objectives. It is also apparent, that despite all of this activity a vast amount of work is still needed. For example, an update on the United Nations Sustainable Development Goals provided sobering reading, suggesting the world’s collective effort is some way short of achieving many of the objectives by 2030.
However, I thought it would be helpful to try and take a step back from all of the ‘noise’ and just remind advisers that across the business there is a commitment to influence change. Engagement will be a key driver, with exclusion often the last resort, although areas like coal have been at the forefront of investors’ minds for some time. But, even with coal the lines can become blurred as large companies make significant investments in to renewable energy.
When thinking of ESG, it is also important to make the distinction between ranges like PruFund Planet, where the overarching aim is to invest in companies that are aiming to create solutions to the worlds many challenges, to PruFunds, where engagement at large scale across a much wider universe of investee companies can create positive change across all industries. Both have an important role to play but for different reasons.
I hope this this article provides some useful insight in to the work that goes on behind the scenes when building and embedding good stewardship and responsible investing across multi asset portfolios.