Walking the path to net-zero with clients
In conversation with Fabiana Fedeli of M&G investments
TO THE POINT
- Sustainability is not only about climate but also about how investee companies interact with employees, communities and the wider public.
- When it comes to “brown” assets, engagement is much better than exclusion.
- While investment managers can catalyze the net-zero transition, they cannot achieve it alone. They need to include clients on this journey, and for governments and regulators to set clear standards and taxonomies.
- The key to generating higher ESG-compliant returns is to broaden the sustainable opportunity set. It is not just renewables but also traditional companies making better use of resources.
- ESG data is nascent, incomplete and incoherent. Cracking this nut is one of the most significant challenges of ESG investing.
M&G Investments is part of M&G plc alongside Prudential, the British life assurer founded in 1848. It is a signatory to The Net Zero Asset Managers Initiative (NZAMI), committed to supporting the goal of net-zero greenhouse gas emissions by 2050 or sooner.
Fabiana Fedeli joined M&G Plc in August 2021. She has been appointed to the newly created role of Chief Investment Officer, Equities and Multi Asset, overseeing GBP100 billion in assets under management. Joining from the Dutch Asset Manager, Robeco, a pioneer in sustainable investing since the 1990s, Fedeli has a long track record of success in this field, and her M&G Investments’ brief includes integrating sustainability into the firm’s active equity and multi-asset offerings.
In this interview, Fedeli talks about her passion for nature, M&G Plc’s deliberate approach to environmental, social and governance (ESG) commitments; finding “alpha” by broadening the sustainability investment set; regulatory and data challenges; and taking clients on the path to net-zero.
Fabiana joined M&G in August 2021 and is Chief Investment Officer, Equities and Multi-Asset. She was previously Global Head of Fundamental Equities and Portfolio Manager in the Emerging Markets Equities team at Robeco, responsible for teams in Rotterdam, Zurich, Hong Kong and Shanghai. Prior to joining Robeco in 2013, Fabiana was a Portfolio Manager Asian equities at Pioneer Asset Management and at Occam Asset Management. She began her career at ING Barings Tokyo as a Research Analyst in Japanese equities in 1999. Fabiana holds a Master’s in Economics from Hitotsubashi University in Tokyo and a Bachelor’s in Economic and Social Sciences from Bocconi University in Milan.
What sparked your interest in sustainable finance?
I have a passion for outdoor sports and nature, and I realized the impact that we are having on biodiversity [and the] climate. My previous experience in the Netherlands, where people are very aware of the environment, [had] an impact on me. We cannot be blind to climate change and the [effect] we have on biodiversity. We don't want to leave that kind of world to our next generations. I worked for an asset manager who is [a] pioneer in sustainability, with colleagues who had been trying to embed sustainability in investment since [the] 1990s. I found their passion towards sustainability fascinating and energizing.
Some believe that the investment manager or the country that acts on climate first pays the costs at the expense of higher returns, while others get a free ride. The argument is that if you invest in a smaller asset class, the returns must be lower by definition. Or, to put it another way, is it harder to generate “alpha” given the “herding” towards, and overpricing of, ESG-compliant assets?
No. For many years, sustainable strategies have outperformed mainstream strategies, and they are bound to have periods of underperformance at times. But the long-term prospects are strong. We are simply following an important trend in our lives, in the way we do business, [and] in investment. Even if you just want to go by the principle [of] “follow[ing] the money”, then you must follow investment in a low-carbon world.
There are different rationales for sustainable investing, for example, momentum or moral. Some also argue there is a correlation between companies that are well-run regarding climate and well-run in other ways. What is the most important driver for allocating assets to sustainability goals?
I believe [that] anything that is well-run from a carbon standpoint is also more efficient. There has been a lot said about the impact that the invasion [by] Russia of Ukraine has brought in terms of higher prices of hydrocarbons. A company that had invested in efficiency and found alternative fuel sources [is] probably better off than companies that are completely exposed to carbon and had not made any efforts toward efficiency.
Sustainability is not only about climate, but also the way you interact with your employees, impact communities, and the way you interact with the public from a social perspective. Governance is paramount.
One of the areas that [is] not always as well understood [and] capitalized on [in sustainability] is the opportunity set.
When we talk about sustainability, we all think about renewable companies. Sustainability is so much more than that.
Journalists [often ask how we find investments in] the low-carbon ecosystem [when there are] very few companies listed. That's not true. Sustainability is [also] traditional companies that have implemented more efficient operations. Sustainability is companies that have software, for example, AI or hardware, that is facilitating better use of our resources.
If you consider sustainability not only as a risk but also as an opportunity, [it] impacts your top line. You can expand [into] areas where no one else has gone. You can find a new set of clients. Many companies in traditional sectors have significantly expanded their footprint towards more sustainable [and] efficient practices, and new technology.
How would you describe M&G Investments’ approach to sustainable investing?
M&G [Investments] has not been a pioneer [of] sustainability and yet some of the teams, through passion, hard work, determination [and] focus, have really reached a very high standard, comparable to others in the industry who claim to be pioneers. That was something that positively impressed me. It is pervasive across all the teams to try to achieve first-rate ESG research and first-rate results.
Our approach [to sustainability] is in line with [what] M&G [Investments] has always done. That is based on fundamental research—in-depth, in-house, as much data as we can gather, and trying to develop the best tools from an IT standpoint to support us in that.
With every type of research that we do, we want to have the best data [possible] to base [investment] considerations on. This is more difficult from an ESG standpoint because a lot of the data is nascent [and] still not complete, not coherent … and that is really one of the biggest difficulties for us … [getting data on] smaller [investee] companies’ scope three [value chain emissions], rather than scope one [direct emissions] and scope two [indirect emissions]. It's a certain granularity of data that is still not there.
And that is really one of the biggest difficulties for us.
There are also instances where two data providers might have contradicting data points. What we try to do, in that instance, is to use our internal research to make sure that we drill down and verify the data.
For example, there is often [the] double counting of water or carbon emissions when there is a holding company with subsidiaries under it. That is a common error and a risk. [This] is why we [strongly] believe that fundamental research really adds value when investing in sustainability.
But data has improved over the last few years, and we feel we have sufficient data in certain areas where we can make carbon-related commitments.
It's funny when companies claim that they're just perfect at sustainability. Nobody is perfect at sustainability. We are still at the beginning of a journey, but we're very serious about this journey.
To what extent do you interact with other sustainability strategies in M&G Investments, such as Catalyst [an initiative to invest up to GBP5 billion in privately-owned assets tackling ESG challenges]?
A lot! One of the traits that really attracted me to M&G [Investments] is that we are large enough to have a very wide set of resources in public and private markets, but small enough that we can interact in a close way. M&G [Investments] is incredibly advanced and determined to achieve results but do[es] things in a very cautious, thoughtful, and deliberate way.
Some see investment management as the key catalyst for the net-zero transition. Do you agree? And is the industry fulfilling its potential?
We believe that our industry has a role to play, [but] there is a shared responsibility. We're not able to do [this], first and foremost, without our clients. We have [a] fiduciary duty towards our clients, and we need to walk this path together.
[Most] clients agree with sustainability goals. [Most] see where the world is heading, but not all clients are at the same stage.
Secondly, [we’re unable to reach net-zero] without governments [and] regulators helping us with clear and consistent guidelines. In Europe, the regulator is a very strong engine behind [sustainability]. The [EU’s] clear guidelines and better disclosure on sustainability broadly [reflect] public opinion.
It is important that regulation remains clear and consistent. One of the biggest challenges [is] to make sure the industry [has consistent] regulation across different regimes. We invest globally, and our clients are everywhere in the world.
Geographically, there is a very big difference. Clients in Europe are keener on embedding sustainability in investments; [while] in North America, sustainability is still not at the forefront. I'm sure the pace of regulation is partly to do with [these differences]. Asia is developing quickly, as Asia often does, on the path towards sustainability.
Russia’s re-invasion of Ukraine appears to have placed energy security and the cost of living in conflict with the net-zero transition. Has the conflict, and the big sell-off in equities in the first half of 2022, changed your view on the speed of the transition?
No. If anything, it has underlined that we have to speed up our independence from hydrocarbons, particularly in Europe. At M&G [Plc], we believe in a just transition. If you look at our coal policy, we really support and engage with companies. We don't simply strike them out because they might still have a coal plant. We want to make sure [it] is being phased out in a reasonable amount [of] time, [and that] it's not being sold to rogue operators.
I don't think any clients doubt that, [in the] longer term, the world is decarbonizing, but many have concerns that it’s going to take time. And they have a fiduciary duty towards, for example, retirees. They have a concern that they might be missing out on some opportunities [by] completely excluding carbon. We understand that, and we work together on the transition toward decarbonization.
The Financial Times published a “Big Read” article called “The war on ‘woke capitalism’"i. What’s your view on the perceived slowdown in or even backlash against ESG?
We carry on with what we have been doing, [supporting a just] transition [and] not just strik[ing] out all hydrocarbon investments. We obviously have sustainable strategies. We have climate strategies. We have Paris [Agreement]-aligned strategies, and [these] have very strict [guide]lines on hydrocarbons. But, as an asset manager overall, we still invest in some hydrocarbons. We talk a lot with clients. Debate is a very good thing.
M&G Investments has joined the NZAMI initiative. What are you doing to reach net-zero?
We've done a lot. We have joined the Powering Past Coal Alliance (PPCA) and implemented our coal phase-out strategy. We have joined a few initiatives, such as the Climate Action 100+. We're being very active in engaging with [investee] companies. We are part of the Climate Transition Plans (CDP). We collaborate with CDP, in particular working on water security, risks and opportunities. We have an impact team working on biodiversity [and] on how we can best embed that in our investment strategies. These are just a few examples.
M&G Plc complies with the UK’s Stewardship Code. How do you choose between active engagement and divestment of “brown assets”?
For us, engagement is way better than exclusion. If we can engage with companies [and] help them transition to having a lower impact on the environment, to better practices from a social standpoint, or to better governance, that is always [our] preference.
Are there any other challenges that you would call out in terms of implementing ESG strategies?
There are two potential disconnects between what we as an asset manager might want to do from a sustainability standpoint, and [our] fiduciary duty towards our clients. One is the timing. We might decide that, based on our values, we want to walk faster on that path towards net-zero, [but] our clients [may] need more time.
Also, those goals that we talked about, and also the alpha that I strongly believe will come from our search for a more sustainable world, is the longer-term objective. Some of our clients might have shorter-term goals. [For example] what has happened with hydrocarbon prices during the Russian invasion of Ukraine [has] clearly created a shorter-term opportunity on hydrocarbon prices. There is a timing disconnect between the longer-term nature of sustainable goals and shorter-term cycles in the market.
There are also the other disconnects, such as culture and geography. Some geographies are far more advanced on the path to sustainability than some others. So that is what [I wouldn’t say] worries me, but [rather what] I have to pay a lot of attention to, really making sure that this is a journey that I am walking with my clients.
When I talk to many of my team members, particularly [but] not only the younger ones, they really believe in [a] carbon-free world. They're really passionate about it. So, to me, that is enough of a reason to believe that we will eventually get there.
i Andrew Edgecliffe-Johnson, "The war on 'woke capitalism," Financial Times, May 27, 2022.