M&G’s approach to responsible investment Introduction. .1 Environmental, social and governance (ESG) factors. .1 Responsible investment bodies and initiatives. .2 M&G – applying ESG across asset classes ����������������������������2 Our approach to exclusions. .4 Introduction Environmental, social and When M&G Investments was founded in 1931, it had a governance (ESG) factors single purpose: to help its customers prosper by putting M&G believes that ESG factors can have a material their savings to work. Some 85 years later, we are an impact on long-term investment outcomes. Our goal international business with offices and clients around is to achieve the best possible risk-adjusted returns for the world, yet our purpose remains unchanged – a focus our clients, taking into account all factors that influence on creating wealth for our customers. investment performance. Consequently, ESG issues are Throughout this time, responsible ownership has been incorporated into investment decisions wherever they a constant. As a long-term investor, we are ideally have a meaningful impact on risk or return. We apply placed to influence corporate behaviour. At a time when this approach to ESG analysis across all asset classes and the typical holding period of an investment can be sectors in which we invest. measured in months rather than years, our willingness While we consider it essential to include ESG to support companies throughout their business issues in our investment analysis, we do not make and market cycles gives us great credibility with the investment decisions based solely on our ESG views. management of those companies. Rather, investment decisions are made after giving Beyond traditional governance issues, including appropriate consideration to all factors that influence an remuneration and board composition, we also consider investment’s risk or return. a wider range of factors that can have meaningful M&G is a long-term investor, and since ESG issues tend impacts on our investments. Environmental matters to evolve over the longer term, we consider such factors and social issues are becoming increasingly important as a fundamental component of our investment process. aspects of assessing an investment, and our approach We regard it as part of our fiduciary responsibility to is to incorporate environmental, social and governance include ESG issues in our investment views, as we do for (ESG) factors into our investment decision-making all factors that influence long-term investment results process by putting them at the heart of what we do. for our clients. M&G takes its responsibilities as an investor seriously. Investment teams share an acute awareness of their duties as stewards of our clients’ assets, and this perspective informs all investment decisions. Across the asset classes, M&G’s investment teams are given a high degree of autonomy in the design and implementation of their respective investment processes. Investment teams are not directed by top- down ‘house’ views, but rather by rigorous fundamental analysis of individual investment opportunities. Responsible investment bodies We believe that the long-term success of companies is supported by effective investor stewardship and high and initiatives standards of corporate governance. We think that if a M&G is a signatory to the United Nations Principles for company is run well, it is more likely to be successful in Responsible Investment (UNPRI) and has committed the long run. Social and environmental issues can also to adhere to the Principles where they are consistent have an important impact on a company’s performance with M&G’s fiduciary responsibilities. We believe the and successful development. We therefore look at how Principles are consistent with both M&G’s longstanding companies address these issues when we analyse them. values and the independence of the various teams’ M&G’s Corporate Finance and Stewardship team are investment processes. advocates of responsible share ownership and oversee M&G is also an active member of a number of bodies our stewardship of the companies in which we invest. and initiatives focused on responsible investment. Regular meetings with company directors allow us to These include the Investment Association, the Asian identify whether a company’s strategy is aligned with Corporate Governance Association, the Institutional our interests as long-term shareholders. Our active Investors Group on Climate Change, the UK Sustainable engagement with companies helps us to understand Investment and Finance Association, the Better the issues affecting them and, where appropriate, to Buildings Partnership and the Green Bond Principles, encourage positive change. among others. Active voting is also an integral part of our investment The M&G Responsible Investment Advisory Forum approach, which is why we believe exercising our votes Notes: adds value and protects our interests as shareholders. oversees the governance and management of • Change document language; in the Basic Paragraph responsible investment activities as part of M&G’s For M&G Infracapital, as owners of essential style, amend language under Advanced Character UNPRI signatory status. Attended by two main board infrastructure assets, responsible investing is critical to Formats. All other styles will be updated. directors of M&G and chaired by M&G’s Head of our strategy. Importantly, by taking controlling equity Corporate Finance and Stewardship, the Forum includes stakes in our investments, we are able to actively drive • URLs/emails – green ‘and’ is automatic. among its members a representative from each business our responsible investment approach throughout the • { } brackets around words will produce bold text. unit involved in investment management. lifecycle of our ownership. • Most non-breaking elements are automatic, M&G – applying ESG across Our responsible investment approach is fourfold: including orphans. Infrastructure, by its essential nature, can meet asset classes many social and environmental needs: through We believe we should both implement responsible our investment strategy we see a variety of attractive investment principles in the funds we manage and apply investment opportunities in which we can make a the spirit of those principles in our business operations. positive impact on society. Equally, we may negatively By driving environmental enhancements in our own screen investments in sectors and countries where these offices, we can reduce our own impact and operating factors are lacking and long-term value may suffer. costs. Through engagement with our staff, we can A key component of our investment process and improve satisfaction, and attract and retain employees. due diligence is ESG: we review potential investments In the following sections, we cover our approach to for ESG issues through our own hands-on due diligence responsible investment with specific reference to the and by engaging specialist advisers, seeking mitigations equities, fixed income and real estate investment where appropriate. capabilities of M&G. More detailed responsible We apply an active asset management approach: investment policies for individual asset classes are through taking controlling or significant minority available on the responsible investment pages of stakes in our investee companies, we can manage risks M&G’s website. effectively, improving ESG standards across our portfolio Equities to ultimately enhance value. M&G understands the importance of our role as And we ensure strong governance and oversight of stewards of our clients’ assets and as an active manager, our business: through regular reporting on relevant key both for the benefit of our clients as demonstrated by performance indicators and ESG metrics, we maintain our investment returns, and for society as a whole by robust governance and oversight. providing capital to those companies that need finance to expand and create jobs and wealth. Fixed Income future-proof our assets, ensuring they have enduring We believe we will do our best for our fixed income appeal as workplaces, homes and leisure destinations, clients if we give all the factors influencing investment benefiting communities and economies around the world. performance appropriate consideration. Our fixed In order to deliver our RPI vision and objectives, M&G income fund managers recognise that environmental, Real Estate seeks to embed responsible investment social and governance (ESG) issues can have an considerations into all investment activities and decision influence on investment outcomes and hence ESG making. We are focused on performance in four key areas: factors play a key role in investment decision-making. Environmental Excellence: Driving environmental Given the limited upside and significant possible improvements at our assets reduces operating costs, downside of fixed income investment, the focus of carbon emissions and the use of natural resources. This our ESG analysis is on understanding downside risk, helps attract and retain occupiers, and ensure that we in particular understanding the tail-risk of significant appropriately manage environmental risks. loss due to ESG concerns. M&G is a long-term investor with substantial holdings of private and illiquid debt. Health, wellbeing and occupier experience: People Since ESG issues often develop over the longer term want to work, live and spend time in places that make and given the long-term and illiquid nature of many of them feel happier, healthier and productive. Considering