This M&G fund boasts a low ESG risk, measurability and impressive stock selection which comes from their triple-layered stock screening process. This screening process provides you with a significant level of certainty that few unethical holdings will be included in the fund, however, it does not completely exclude some questionable companies. The best aspect of this fund is its high level of transparency. In the Annual Impact Report 2020, they identify controversial areas of their portfolio. These include the predatory microlending by emerging market banks, what constitutes impactful healthcare, and different scopes of climate metrics. Although these shortcomings are faced by all asset managers, M&G is the first I have come across who have admitted these limitations. Most importantly they have described how they are working to remove these issues, hence why I have rewarded them with such a high score.
M&G Positive Impact Fund contains $213.21 million in assets concentrated across 40 holdings as of 28th February 2021. The fund invests in companies that have a positive impact on society through addressing the world’s major social and/or environmental challenges. The low number of holdings and investments in emerging markets increases risk leading to a high risk rating of 5/7.
The top 10 holdings have an overall weighted ESG score of 19.7, identifying a low ESG risk that would be expected from a positive impact fund. This means that the average holding has minimal exposure to environmental, social and governance issues. Overall the holdings paint an impressive picture of the fund’s objective towards achieving the SGDs. M&G also provide a notable impact analysis of each holding using a company-specific, fundamental approach to calculate the positive benefits of each firm. However, company provided metrics can be misleading and often exaggerate their achievements. On the negative side, we can see HDFC Bank Ltd as a key holding. This is India’s largest private bank and looks out of place with the surrounding holdings of renewable energy providers and software companies. The fund also includes two other banks and two insurers which carry negative implications for the overall societal benefit of this fund. Financial institutions especially in emerging markets commonly engage in unethical pricing practices and can take advantage of financially illiterate populations.
Overall, I am really impressed with the investment approach employed for this fund. The fund has a triple-layered screening process which provides an integrated framework to select holdings. The first layer of this process is the exclusion of many sin sectors, such as tobacco, firearms, and fossil fuels. M&G excel in these exclusions as they don’t allow ‘transition’ fossil fuel companies. They only invest in energy companies that were either set up as renewable businesses from scratch or those that have made significant grounds towards an explicit science based target to transition to 100% renewables. This is an extremely impressive stance as the vast majority of other asset managers invest in ‘transition’ utility providers that continue to pollute heavily.
The second layer of screening is looking into each individual company’s intentions (mission statement), investment credentials (including ESG) and their impact. Impact is then further split into measurability, materiality, and additionality. I will focus on additionality here which describes the resultant impact of every pound invested. This is the hallmark of true impact investing as it identifies the additional impact that would have resulted from your investment. The caveat to this is the difficulties of measurement, but this drawback is identified and explained in their reporting which provides a high level of transparency.
Finally, the potential holding must either be a pioneer, enabler, or leader in addressing the world’s major environmental and social concerns. The pioneer and leader credentials are sound but the downside I can identify in this approach is in the ‘enabler’ credential. This allows for the financial institutions such as HDFC to be held with the justification that banks provide credit to low income earners, thus allowing economic growth and ‘social inclusion’. This seems quite a fanciful claim with the firm’s history of due diligence failures and online banking glitches. Similarly, this credential permits the inclusion of many pharmaceutical companies which have more tenuous positive impacts. Both of these sectors have a minimal visible impact and unfortunately take away from what, on the face of it, is a superior holding selection process to most other funds.
The Fund is managed by John William Olsen assisted by Thembeka Stemela. They both have an impressive history in financial management but lack experience in environmental funds. This is supplemented by Ben Constable Maxwell the Head of Sustainability and Impact Investing at M&G. Mr Maxwell has 9 years of experience in the sustainable investing space with a current focus on impact investing.
M&G Investments was founded in 1931 and has £367 billion in assets under management. They have an ESG score of 25.1 and appear to be a standard asset manager. Looking at their engagement principles they view dialogue with companies as fundamental to the impact investment approach. They are part of the Global Impact Investing Network, IMP-ACT Alliance and more, which imply their commitment to impact investing. M&G is also encouraging companies to adopt coal phase-out plans. While this is positive, they are still heavily exposed to fossil fuels and it remains unclear how their own phasing out will be implemented.