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ESG and impact investing Investment approaches for a sustainable future July 2019

INVESTMENTS

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested.

Investment attitudes are changingInvestors are increasingly looking for outcome-oriented ‘solutions’ and goal-based investment strategies to meet their evolving needs and expectations over the longer term. The desire among institutional asset owners, pension scheme members and individual savers to invest responsibly, embrace sustainability and contribute to society without having to sacrifice returns in the process, is also shifting attitudes in favour of sustainable investment approaches.

This imperative of sustainable finance is not new, but the impetus for action and implementation has been building since the dual ratification of the Paris Agreement and the 2030 Agenda for Sustainable Development – which led to the formulation of the UN Sustainable Development Goals (SDGs).

The growing ambition to develop more rigorous and proactive investment portfolios that put sustainability-based objectives at the very core, is helping to channel greater amounts of private capital towards investments that offer tangible, real-world impact. The sustainable finance industry is evolving rapidly to keep up with demand, offering investors viable opportunities to invest their capital in projects and companies that tackle a range of fundamental global challenges driven by climate change, natural resource scarcity and demographic change – to name but a few.

ESG and impact investing 3

Global growth trends in ESG and sustainable investing All surveys that attempt to quantify the flow of capital into ESG and sustainable and responsible investment (SRI) strategies agree that investor inflows have continued to accelerate over recent years. According to figures presented in the GSIA’s biennial Global Sustainable Investment Review, a total of US$30.7 trillion was invested in strategies pursuing an SRI or sustainable investment strategy as of the end of 2018, representing a 34% increase in two years [Note: ‘SRI’ and ‘sustainable investment’ are used interchangeably herein].

The table shows the share of sustainable investing assets across the five major markets and their growth rates based on the figures presented in the GSIA’s 2016 Review:

Global sustainable investing assets by region

Region 2016 2018Growth per period

(2016-2018)*

Compound annual growth rate (2014-2018)

Proportion of sustainable investing relative to total managed assets (2018)

Europe $12,040 $14,075 11% 6% 48.8%

United States $8,723 $11,995 38% 16% 25.7%

Japan $474 $2,180 307% 308% 18.3%

Canada $1,086 $1,699 42% 21% 50.6%

Australia/New Zealand $516 $734 46% 50% 63.2%

Total $22,890 $30,683

Source: Global Sustainable Investment Alliance (GSIA) “Global Sustainable Investment Review 2018”, published April 2019

Notes: Asset values are expressed in billions of US dollars. All 2016 assets are converted to US dollars at the exchange rates as of year-end 2015. All 2018 assets are converted to US dollars at the exchange rates at the time of reporting. All 2018 assets in the report are as of 31 December 2017, except for Japan, whose assets are as of 31 March 2018. * Growth figures by region are calculated using asset values expressed in local currency.

The scale of the sustainable investing market differs greatly by region. Europe leads the way with a total of $14 trillion, followed by US investors with $12 trillion worth of assets held in this category. Japan has seen the most notable growth in SRI assets of all five regions, albeit from a much lower base. The proportion of sustainable investing relative to total managed assets also grew in most of these regions – with the exception of Europe, which is partly due to a shift to stricter standards and definitions for sustainable investing.

ESG and impact investing4

Exclusions still widely applied but other SRI strategies are gaining ground Although these survey findings should only allow for cautious interpretations to be made due to definitional differences between regions, the different time periods used for surveys and the limited data history more generally, some interesting trends can be seen looking at the preferred investment strategy by region. The GSIA 2018 review shows that ‘negative/exclusionary screening’ remains a dominant SRI strategy globally in terms of assets but it is not the fastest-growing strategy, whereas ‘corporate engagement and shareholder action’ is the main strategy in Japan followed by ‘ESG integration’.

Focusing on Europe, the corresponding Eurosif SRI study 2018 suggests that ‘ESG integration’ remains, by far, the preferred sustainable investment strategy in the region, growing by 60% in the survey period based on the assets affected and with a compound annual growth rate (CAGR) of 27%. ‘Engagement and voting’ also gained further ground in Europe during the survey period (CAGR: 7%) from an already high base, while there was more moderate growth in ‘Impact investing’ (CAGR: 5%) compared to the previous Eurosif survey – although this strategy has experienced significant growth of 52% over a six-year period.

Greater adoption among a wider set of investorsMost of the growth in the breadth and depth of SRI activity to date, and indeed integration of ESG across asset classes, can be put down to demand from (often large) institutional investors such as pension funds, foundations and insurers, seeking rigorous and proactive investment portfolios that put social and environmental objectives at the core. However, surveys suggest that SRI investing is attracting a wide variety of investors, individual and institutional – retail investors reportedly held one quarter of total SRI assets at the start of 2018 compared to 11% in 2012, according to the GSIA.

Sustainable finance – evolution through innovationInvestor demand has also followed greater public attention to the global sustainability agenda, leading a new generation of pension scheme members and individual savers to demand greater transparency on their investments. Sustainable finance may still only be a small fraction of overall financial activity in private markets but this could change as calls for immediate and ambitious action on global issues such as climate change and plastics pollution grow louder. Rhetoric from governments, central banks and supervisory authorities on climate change and sustainability will also continue to feed into long-term investment decisions, but arguably more needs to happen to mobilise capital on the scale required.

“Carbon emissions have to decline by 45% from 2010 levels over the next decade in order to reach net zero by 2050. This requires a massive reallocation of capital... The prime responsibility for climate policy will continue to sit with governments. And the private sector will determine the success of the adjustment.” – Extracts from an open letter on climate change-related financial risks from the Governor of Bank of

England Mark Carney, Governor of Banque de France François Villeroy de Galhau and Chair of the Network for Greening the Financial Services Frank Elderson, published 17 April 2019


‘Use of proceeds’ bonds and the green finance revolution There has already been significant advances in mobilising (and mainstreaming) environmentally-focused, climate-aligned or ‘green’ finance within the wider financial industry. The range of new and innovative green investment products and market-based solutions, that aim to target better outcomes for the environment and society, is ever expanding. The global green bond market has been growing rapidly in size and importance in the past five years to meet strong institutional investor demand, for instance. The size of the market is forecast to reach $1 trillion of annual issuance by 2020, but it is still a very small portion of the public debt market – the global green bond universe is estimated at around $389 billion1 compared to the $23 trillion global, non-sovereign public bond market.2

The ‘use of proceeds’ bond market has evolved to include new thematic bonds, such as social bonds (used for projects with positive social outcomes), sustainability bonds (combination of both environmental and social projects), ESG-bonds (global bonds labelled with high ESG standards), SDG-bonds (to finance businesses and projects that promote the 17 UN SDGs) and even ‘blue bonds’ (used for marine projects), which are aimed at addressing broader sustainability issues.

From a sustainable finance perspective, new technologies and methodologies aimed at improving data – along with consistent standards, definitions and frameworks – is helping to ensure the continued growth and development of the wider industry.

Investing responsibly and driving sustainable, long-term portfolio returns At M&G, we work together with our clients to provide them with investment capabilities and strategies that can help to meet their evolving needs and expectations over their investment horizon.

We allocate long-term capital to responsibly-managed businesses and target investments and practices that drive sustainable, long-term growth and profitability. As an active, long-term investor, ESG risks and opportunities play an important role in our analysis, due diligence, investment and engagement processes across our asset classes. We believe incorporating ESG factors into investment and asset allocation decisions where they have a meaningful impact on risk and return can help to better manage risk and generate sustainable returns.

Responsible engagement: Agents for changeActive engagement is also crucial to ensuring specific ESG issues are managed responsibly, whether we are shareholders, debt holders in an investment or owners of assets. Asset managers can facilitate engagement efforts by acting as ‘change agents’ on behalf of investors, using their size and influence to target specific outcomes, push for strong disclosure, and increasingly to bring about positive change over the long term.

Engagement on ESG issues is traditionally associated with being a shareholder, since owning shares in a company typically grants voting rights, but it is both critical and effective for debt holders. While engagement is fundamentally about communication, the means for communicating concerns and addressing key ESG issues can include a range of activities and can be adapted depending on the focus and objectives of the engagement.

1 $389 billion refers to outstanding labelled green bond volume. Climate Bonds Initiative: “Bonds and climate change. The state of the market 2018”, as of September 2018 2 For comparison purposes, figure is as of September 2018


“This shift in institutional investor practices towards ‘active’ forms of ownership indicates that institutional investors recognise that their fiduciary duty to clients and beneficiaries should involve purposeful consideration, monitoring and intervention regarding ESG factors affecting investee companies.” – The Principles for Responsible Investment (PRI), “How ESG engagement creates value

for investors and companies”, published 26 April 2018

M&G ESG,sustainableand impactinvestment

Impactfinancing

PositiveImpactEquity

SustainableMulti Asset

GreenfieldInfrastructure

M&G RealEstate

Global HighYield ESG

Bond

Pan Europeanand Global

Select Equity

To address the investment objectives of our clients who seek a more targeted approach to ESG and impact, we have a growing suite of investment strategies that are explicit in their stated aims and objectives:

A growing suite of ESG-focused and impact investment strategies

These strategies encompass a broad range of sustainable investment approaches with different levels of implementation – ranging from norms-based exclusions and negative screening to impact investing – and each with their own risk, return and impact profile. While the aims of these investment strategies vary, the common theme underlying all these strategies is an explicit emphasis on environmental, social, and/or governance issues. In the past six months, we have strengthened our dedicated impact investment capabilities with the launch of Positive Impact Equity, our listed equity impact strategy, and we have added a new multi-asset strategy, Sustainable Multi Asset, that targets sustainability outcomes by applying a dynamic approach to asset allocation and investing in assets that are considered to have positive impact on society.

Furthermore, work is underway to launch an emerging market corporate ESG bond investment strategy. This strategy will identify opportunities to invest in hard currency debt securities issued by emerging market companies and quasi-sovereigns that meet certain ESG criteria.


M&G Pan European and Global Select Equity

ESG engagement as a shareholder in action

Discover Financial Services and Ansys – taking measures to ensure appropriate data securityWe regularly engage with companies on issues that are material to their business or to the industries in which they operate. Two such recent discussions involved companies where privacy and data security pose a real threat: Discover Financial Services is a credit card issuer, where data is at the heart of its competitive advantage; Ansys is the global leader in creating software simulation environments, which customers use to test the characteristics of products in their pipeline.Generally, data security is an area in which companies purposely provide poor transparency and disclosure. This is understandable as companies, naturally, do not want to deliver a blueprint of their security defences to hackers and other types of malicious attacks. However, we often get the opportunity to discuss matters with management teams and data security analysts within a company. While these discussions will never eliminate the possibility of a data breach, they do provide us with a basis to rate a company’s approach to threats and better understand risks.

Both Ansys and Discover follow basic but important protocols, such as clear lines of responsibility of data security matters, documented escalation processes and the requirement for staff to complete testing and attestation on data security matters on an annual basis.

Discover holds greater amounts of personal and financial data, and as such employs an industry-leading protection mechanism, known as tokenisation. It also hires external hacking teams – so called ‘white hat’ hackers – who are solely compensated on locating system and data security vulnerabilities. Our conversations with both companies gave us comfort that they were taking appropriate measures to secure their data.

Pan European Select Equity and Global Select Equity, along with Pan European Select Smaller Companies, are equity strategies that fully integrate ESG factors into the investment process.

• Proprietary ESG research: Environmental, social and governance factors are a central element in our investment approach, forming part of the framework used to identify long-term sustainable business models. The consideration of these factors also allows us to understand the full range of risks and opportunities to which a company is exposed, both financial and non-financial alike.

• Ongoing engagement: Meeting management teams of investee companies is an integral part of our process. We believe that the way in which a company is run and how it treats the environment, as well as its employees and the communities in which it operates, are fundamental to its long-term success. We therefore engage with company management to gain comfort that they are aligned with our values and, when we see room for improvement, to encourage positive change.

• UN Global Compact screening: The UN Global Compact is a corporate sustainability initiative, asking companies to align strategies and operations with universal principles on human rights, labour practices, the environment and anti-corruption. We exclude companies from our investment universe deemed to be in breach of these principles, as defined by ISS-Ethix.

• Sector screening: We also exclude companies that are involved in the production of tobacco and controversial weapons including cluster munitions, anti-personnel mines and chemical and biological weapons.


M&G Positive Impact Equity

Equity impact in action

SolarEdge – increasing solar energy usage Established in 2006, SolarEdge is a global manufacturer of solar inverters, along with other solar energy solutions. As a global leader in smart energy technology, SolarEdge is driving more efficient energy consumption as inverters maximise power generation while lowering the cost of energy produced by the photovoltaic (PV) solar panel system. Improvements in energy efficiency play a significant role in taking strain off energy networks. Rapid deployment of PV systems could help solar become the largest source of low-carbon energy capacity by 2040, by which time the share of all renewables in total power generation is expected to reach 40%.

SolarEdge contributes most clearly to SDG 7: ‘Affordable and clean energy’.

Kroton Educacional – providing equal access to quality educationFounded in 1966, Kroton is the largest private educational company in Brazil. Generally speaking, the more affluent students in Brazil attend expensive private schools and progress to public universities, but few lower-income students are able to afford the fees. Kroton helps to break down barriers to private education by providing opportunities for these students to access quality and affordable education. Kroton offers affordable loans and financing for eligible students, and also offers distance learning programmes, which help students living in rural areas access higher education.

Kroton’s provision of education aligns most closely to SDG 4: ‘Quality education’.

An impact investment strategy that seeks to deliver competitive financial returns by investing in the listed equity of quality, sustainable companies that are addressing the world’s major social and environmental challenges.

• Fundamental research: We identify impactful investments through our proprietary ‘triple I’ approach, analysing the Investment quality, Intentionality and Impact of a company to assess its suitability. As part of this analysis, we internally score companies on their ‘III’ credentials, and require above-average results for inclusion in our watchlist as well as consensus agreement from the team. We then invest in these businesses when they are trading at a discount to what we believe to be their intrinsic value.

Both sustainability and impact considerations are fundamental in determining our investment universe and assessing business models, while engagement with companies is another key element of the investment strategy. ESG factors are integrated within the investment process.

• Robust framework: We invest in companies focused on six key impact areas – three environmental and three social – which are mapped against the SDGs.

• Concentrated yet diversified: We run a concentrated portfolio, generally holding around 30 global stocks, across three categories of impactful companies: ‘Pioneers’, whose products or services have a transformational effect on society or the environment; ‘Enablers’, which provide the tools for others to deliver positive social or environmental impact; and ‘Leaders’, which spearhead the development of impact and sustainability in their industries. These categories provide diversification across industries, end-markets, and maturity of business models.

• Screening: We filter out companies deemed not capable of delivering demonstrable positive impact to society. This includes companies considered to be in breach of the UN Global Compact principles on human rights, labour, the environment and corruption, as well as companies involved in the production of tobacco, alcohol, adult entertainment, controversial weapons, oil sands, nuclear power or coal-fired power, or the provision of gambling services.

ESG, sustainability and impact investing at M&G 9

M&G Sustainable Multi Asset

Sustainable allocation in action

Fibria Green Bond – fighting deforestation and biodiversity lossIssuer overview: Fibria is a Brazilian eucalyptus fibre pulp producer.

Investment: In 2017, Fibria Overseas Finance issued a US$ 700 million 10-year green bond, with an annual coupon of 5.5%. The bond was assigned an investment grade credit rating of BBB-, from both ratings agencies, S&P and Fitch. Since the bond was issued, the company was acquired by Suzano Papel e Celulose but this is not expected to impact the bond.

Intentions: The proceeds of the bond issue have been allocated to eligible green projects, including:

• Sustainable forest management for eucalyptus plantations

• Restoration of native forests and conservation of biodiversity

• Waste management

• Sustainable water management

• Renewable energy – optimising biomass boiler efficiency

The analysis of the company’s intentions was also confirmed by Sustainalytics, an independent ESG research company.

Impact overview: Its projects have impacted a significant amount of land that clearly aligns to SDG 15: ‘Life On Land’

At the time of the green bond launch, the company had:

• 1.092 million hectares of forest including 656,000 hectares of planted forests and 374,000 of hectares of environmental preservation and conservation areas.

A diversified multi-asset strategy that aims to generate long-term returns through dynamic asset allocation, while considering ESG factors. The strategy invests in assets that contribute to a more sustainable society.

• Dynamic asset allocation: The strategy employs M&G’s long-standing ‘Episodes’ philosophy by taking advantage of emotionally-driven misalignments in markets. The strategy’s asset allocation positions will be populated by a combination of high ESG-rated holdings and a dedicated core component of selected assets that are considered to have positive impact through addressing the world’s major social and environmental challenges.

• Three-stage ESG screening approach:

1. UN Global Compact – excludes companies in breach of the principles on human rights, labour, environment and corruption

2. Sector screening – excludes companies producing goods or providing services in certain sectors, namely tobacco, alcohol, controversial weapons, gambling, pornography and thermal coal

3. ESG ratings – excludes companies if their ESG rating, provided by MSCI, is below ‘BBB’, and governments that are rated below ‘BB’ (please note these ratings differ from the credit ratings provided by credit ratings agencies).

• Positive impact assets: Potential investments are assessed against our proprietary ‘triple I’ approach to determine their suitability. The quality and viability of each potential Investment is scrutinised alongside the declared impactful Intentions (and practices) of the business. We then assess the Impact of a company’s activities in a number of social and environmental categories, mapped against the SDGs.


M&G Global High Yield ESG Bond

ESG and high yield credit investment in action

Levi Strauss – committed to the responsible sourcing of cottonLevi Strauss is a US-based clothing company well known for its iconic brand of denim jeans. The company reported another year of solid revenue growth in 2018, helped by the continued expansion of its direct-to-consumer offering through its brand-dedicated stores and e-commerce sites. We believe the company’s commitment to increasing its online presence will leave it well-placed to navigate the rapidly evolving retail landscape.

The company also displays positive ESG credentials across a range of criteria. It scores particularly well in terms of its efforts to promote the responsible sourcing of cotton. The company is a member of the Better Cotton Initiative (BCI) – an organisation that promotes better standards in cotton farming – and aims to source up to 75% BCI-certified cotton by 2020.

Another key strength is the company’s commitment to improving labour standards within its supply chain. Levi Strauss has strong policies and programmes in place to help ensure that its suppliers treat their workers fairly. The company’s suppliers need to adhere to strict guidelines and standards that address a range of important issues such as child labour, forced labour, disciplinary practices, working hours, wages and benefits, freedom of association, discrimination, and health & safety.

A diversified global high yield bond strategy that combines M&G’s long-running expertise in high yield credit analysis with leading ESG research from MSCI, an independent research provider. Potential investments are filtered through a three-stage ESG screening approach.

• Three-stage ESG screening approach:

1. UN Global Compact – excludes companies assessed to be in breach of the United Nations Global Compact principles on human rights, labour, environment and corruption

2. Sector screening – filters out and excludes companies that derive part of their revenues from controversial activities; and

3. ESG integration – filters companies according to their ESG credentials and excludes industry laggards that have an ESG rating below 2.9, based on ratings provided by MSCI.

• Diversified investment opportunity: High yield bonds remain an underserved part of the ESG landscape. In total, approximately 35% of the investable high yield market is filtered out once the three-stage screening approach is applied.

• Measurability: The strategy aims to provide investors with a measurable assessment of its overall ESG credentials.


M&G Impact Financing

Impact investment in action

Hornsea Project One – helping to decarbonise the UK’s energy mixHornsea Project One Limited is a project to build a wind farm, situated 120 kilometres off the Yorkshire coast, consisting of 174 separate turbines and covering a total area of 407 square kilometres. The wind farm project, which utilises modern and efficient turbine technology to generate significant amounts of renewable energy, is in the final stages of construction and is expected to power more than one million UK homes once operational.

Impact overview: Hornsea Project One is forecast to produce more than five million megawatt hours of renewable electricity per year, once the wind farm is operational, thereby reducing CO2 emissions by more than 2.5 million tonnes annually.

This investment’s primary impact theme of ‘renewable energy generation’ is most aligned to SDG 7: ‘Affordable and clean energy’ and SDG 13: ‘Climate action’.

Primary Healthcare Properties – increasing access to quality healthcarePrimary Healthcare Properties ICAV (PHP) required financing for seven primary healthcare centres (PCCs) across Ireland. PCCs are central in helping countries like Ireland meet the increasing demands on its healthcare sector resulting from a growing and ageing population, by offering services for patients requiring treatment for non-acute conditions outside of hospitals.

Impact overview: The transaction provides funding for seven operational PCCs and an eighth PCC that is currently under construction. The seven operational PCCs have a total of 58 GPs and serve an estimated 82,000 registered patients. The eighth PCC will add a further 11 GPs to the total once completed. In addition, the PCCs offer a wide range of services and facilities for the treatment of non-acute conditions.

This investment’s primary impact theme of ‘health and social services’ is most aligned to SDG 3: ‘Good health and well-being’.

An impact investment strategy investing in private or illiquid fixed income assets that aims to offer clear and measurable positive environmental or social returns as well as financial returns to investors.

• Robust impact framework and thorough selection process: We assess potential impact investments for their social and environmental impact against a comprehensive criteria developed in conjunction with Sustainalytics, who serve as impact and sustainability advisers for the strategy. These assets are also independently rated from a pure credit risk perspective by M&G’s team of credit analysts.

– This criteria outlines and defines the strategy’s impact universe and classifies impact investments according to one or more of our 12 thematic areas – eight environmental impact themes and four social impact themes

– Within each thematic area, we identify specific sub-themes with their own eligibility criteria and metrics to measure outputs that are tailored to the specific impact theme.

• Targeting real world impact aligned with the SDGs: We map all private and illiquid impact investments to the 17 UN SDGs where they are most aligned by focusing on making clear, tangible links. There are several types of investments under each impact theme that could map to one or more of the SDG targets.

• A competitive financial return: We aim to target investments that make a return in excess of similarly-rated public bonds; ie investments that offer an ’illiquidity premium’.

• Taking a flexible, multi-theme approach: We source impact assets across a wide opportunity set and broad range of impact themes to ensure the best possible value for our clients. This not only helps to potentially maximise returns but also allows for a high degree of diversification – important for any value-based impact investment portfolio. The strategy targets an average ‘investment grade’ credit rating.


M&G Real Estate

Responsible Property Investment in action

Compass One shopping centre, Singapore – building a key community hubWe relaunched this 25,000 square metre shopping centre in Singapore in late 2016, following a major refurbishment to increase rental income and target energy efficiency.

Since then, we have strengthened the centre’s position as a focal point for the community, with a range of events including those to support local charities.

Key achievements against our impact areas include:

• Public library reconfigured across two storeys, with a larger footprint

• Wet and dry playground developed for our younger visitors

• Transport connections considered in reconfiguration of the asset

• Community events launched, such as celebration of Earth Hour and craft workshops

• Over SG$30,000 raised through events in partnership with charity Singapore Association of Visually Handicapped

• 1.5 million-kilowatt hours reduction in annual energy use and 33% reduction in water consumption

• Awarded BCA Green Mark Gold Certification, highlighting energy and water efficiency.

Our sector-leading approach to Responsible Property Investment (RPI) is fully integrated into day-to-day investment activities and is applied to the full range of M&G Real Estate strategies. We use our resources to enrich the lives of people and communities by creating and managing world-class places to live, work and play. This enables us to manage and respond to the growing range of environmental, social and governance issues that can impact property values, helping us drive asset performance for our clients and bring positive value to society and the environment.

M&G Real Estate’s RPI strategy focuses on four key areas with 2025 objectives in these categories:

• Socio-economic benefit: Creating positive socio-economic outcomes by developing high quality places where people want to be. Through proactive participation in communities, we are able to support jobs, skills development and economic growth.

• Environmental excellence: Driving environmental improvements at our assets reduces operating costs, carbon emissions and the use of natural resources. This helps attract and retain occupiers, and ensures that we appropriately manage environmental risks.

• Health, wellbeing and occupier experience: People want to live, work and play in places that make them feel happier, healthier and productive. Considering health, wellbeing and experiential factors in how we design and manage buildings enables our occupiers to have happy productive employees, our retail destinations to attract customers and our homes to be places where people want to live.

• Smart, secure and connected: Smart physical and digital infrastructure is crucial to the competitiveness and success of countries, cities and buildings, as well as positively benefiting inhabitants. Understanding connectivity solutions means we can more effectively identify investment opportunities and future proof investments.

How we benchmark RPI performance: M&G participates in the GRESB Survey to benchmark Fund RPI performance and all nine real estate strategies achieved a Green Star rating in the 2018 Global Real Estate Sustainability Benchmark (GRESB) assessment, positioning them among the highest ranked for sustainability globally.


Greenfield Infrastructure

Sustainable infrastructure investment in action

Bioenergy Infrastructure Group – turning waste to energy Poor waste management practices can cause land and air pollution, resulting in adverse health and safety effects, and contributing to climate change. As a solution to the waste management problem and to limit other externalities such as pollution, Infracapital has made investments in waste-to-energy (WtE) businesses, including Bioenergy Infrastructure Group (BIG).

BIG is one of the UK’s largest portfolios of WtE plants, aiming to divert more than one million tonnes of waste each year from landfill and deliver vital additional electrical capacity to the national grid.

Responding to a waste problem created by policy and supported by government incentives to create energy from biomass, Infracapital has grown an initial £85 million to an investment of £257 million, with further commitments expected in the near future. BIG’s portfolio of seven plants currently has production capacity of more than 110 megawatts of low-carbon energy.

Infracapital is M&G’s specialist infrastructure equity investment group. At Infracapital, we seek to construct and operate infrastructure assets that deliver essential services that will be needed by societies today, tomorrow and in decades to come, in a sustainable manner.

• Infrastructure is essential, sustainability is essential: Infrastructure, by its nature, is crucial to fostering growth and productivity in society. However, it is widely acknowledged that infrastructure investment globally is currently well below what is needed to meet anticipated economic growth projections and aspirations. The need for sustainable activity is even more important in an ever-changing society, where climate change concerns are creating an increasing need for new types of infrastructure. Here the opportunity extends beyond managing the ESG performance of existing infrastructure and investing to provide solutions to the challenges facing society. Both Infracapital’s greenfield and brownfield investment approaches are positioned to respond to these challenges and investment need.

• Infrastructure that meets societal challenges: Our greenfield infrastructure approach focuses on building new infrastructure assets and identifies investment ideas that meet societal challenges and provide solutions from alternative energy generation to fibre rollout. Investing at various stages in an asset’s lifespan can require a different approach to ESG. With our greenfield investments, we have the ability to deliver real impact through the creation of new sustainable investments, shaping a culture and setting a standard for ESG performance.

• A cycle of continued improvement: Our ESG approach starts with the consideration of how our investment strategy can respond to the challenges faced by societies of today and tomorrow. It ensures that material ESG issues and opportunities are identified at acquisition and then addressed and actively driven post-investment. We typically seek controlling stakes in our investee companies so that we can facilitate an active asset management approach, enabling us to manage ESG issues and risk effectively.

Our investment approach reflects a cycle of continued improvement, as we seek to drive greater improvement across our portfolio and our own business, and respond to the ever-changing needs of the societies we serve.


Strategy RisksRisks associated with the Pan European Select Equity strategy, the Global Select Equity strategy and the Positive Impact strategy The value of investments and the income from them will rise and fall. This will cause the strategy price, as well as any income paid by the strategy, to fall as well as rise. There is no guarantee the strategy will achieve its objective, and you may not get back the amount you originally invested. Changes in currency exchange rates will affect the value of your investment. This strategy holds a relatively small number of investments and, as a result, may experience larger price rises and falls than a strategy which holds a larger number of investments. Where market conditions make it hard to sell the strategy’s investments at a fair price to meet customers’ sale requests, we may temporarily suspend dealing in the strategy’s shares. Some transactions the strategy makes, such as placing cash on deposit, require the use of other financial institutions (for example, banks). If one of these institutions defaults on their obligations or becomes insolvent, the strategy may incur a loss.

Additional risks associated with the Global Select Equity strategy and the Positive Impact strategy The strategy will invest in emerging markets which are generally smaller, more sensitive to economic and political factors, and where investments are less easily bought and sold. In exceptional circumstances, the strategy may encounter difficulties when selling or collecting income from these investments, which could cause the strategy to incur a loss. In extreme circumstances, it could lead to the temporary suspension of dealing in shares in the strategy.

Additional risks associated with the Positive Impact strategy The strategy will invest in smaller companies and, as a result, may experience bigger price changes when compared to a strategy which invests only in larger companies.

Risks associated with the Sustainable Multi Asset strategy The value and income from the strategy’s assets will go down as well as up. This will cause the value of your investment to fall as well as rise. There is no guarantee that the strategy will achieve its objective and you may get back less than you originally invested. The strategy may use derivatives to profit from an expected rise or fall in the value of an asset. Should the asset’s value vary in an unexpected way, the strategy may lose as much as or more than the amount invested. The strategy is exposed to different currencies. Derivatives are used to minimise, but may not always eliminate, the impact of movements in currency exchange rates. Investments in bonds are affected by interest rates, inflation and credit ratings. It is possible that bond issuers will not

pay interest or return the capital. All of these events can reduce the value of bonds held by the strategy. Investing in emerging markets involves a greater risk of loss due to greater political, tax, economic, foreign exchange, liquidity and regulatory risks, among other factors. There may be difficulties in buying, selling, safekeeping or valuing investments in such countries. In exceptional circumstances where assets cannot be fairly valued, or have to be sold at a large discount to raise cash, we may temporarily suspend the strategy in the best interest of all investors. The strategy could lose money if a counterparty with which it does business becomes unwilling or unable to repay money owed to the strategy.

Risks associated with the Global High Yield ESG Bond strategy When interest rates rise, the value of the strategy is likely to fall. The value of the strategy may fall if the issuer of a fixed income security held is unable to pay income payments or repay its debt. The strategy may use derivatives with the aim of profiting from a rise or a fall in the value of an asset. However, if the asset’s value varies in a different manner, the strategy may incur a loss. Hedged share classes aim to mirror the performance of another share class. We cannot guarantee that the hedging objective will be achieved. The hedging strategy will limit holders of the hedged share class from benefiting if the hedged share class currency falls against the US dollar. Where market conditions make it hard to sell the strategy’s investments at a fair price to meet customers’ sale requests, we may temporarily suspend dealing in the strategy’s shares. Some transactions the strategy makes, such as placing cash on deposit, require the use of other financial institutions. If one of these institutions defaults on their obligations or becomes insolvent, the strategy may incur a loss.

Risks associated with the Impact Financing strategy The strategy may be exposed to the possibility that a debtor will not meet their repayment obligations. Where market conditions make it hard to sell the strategy’s investments at a fair price to meet redemptions, we may suspend dealing in the strategy. It is intended that the strategy will invest in assets which, at the time of investment are expected to, provide a positive environmental and/or social impact. During the duration of any asset what is considered to be a positive environmental and/or social impact may change and there is a chance that impact expected does not materialise. The AIFM intends to mitigate this by intending to invest in diversified assets and by using ongoing analysis and engagement with relevant issuers.

Please note this is not an exhaustive list, you should ensure you understand the risk profile of the products or services you plan to purchase.


M&G’s commitment to responsible investment is demonstrated by:

• UNPRI signatory since 2013:

– M&G was awarded an overall A+ Strategy & Governance score for 2018 and currently has representation on the UNPRI Fixed Income Engagement sub-committee

• UK Stewardship Code

• Cluster munitions exclusion policy

• Member of the UK Sustainable Investment and Finance Association (UKSIF)

• Member of the International Corporate Governance Network (ICGN)

• Member of the Asian Corporate Governance Association (ACGA)

• Member of Better Buildings Partnership (BBP)

• Member of GRESB Real Estate

M&G supports a number of initiatives to help drive environmental and social change:

• Member of the Institutional Investors Group on Climate Change (IIGCC)

• Member of Climate Action 100+

• Climate Bonds Initiative (CBI) Partner and member of:

– Climate Bonds Industry working group for hydropower investments

– Climate Bonds Industry working group for marine renewable energy investments

– Climate Bonds Industry working group for bioenergy

– European Green Securities Steering Committee

• Signatory to Green Bond Principles

• Member of the Loan Market Association (LMA) Green Lending working party

• Member of the Global Impact Investing Network (GIIN). Our membership signifies a commitment to deepening our engagement in the impact investing industry

Memberships, industry groups and initiatives


ContactUK [email protected]

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www.mandg.com/institutions

For Investment Professionals only. The distribution of this document does not constitute an offer or solicitation. Past performance is not a guide to future performance. The value of investments can fall as well as rise. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and you should ensure you understand the risk profile of the products or services you plan to purchase. This document is issued by M&G Investment Management Limited. The services and products provided by M&G Investment Management Limited are available only to investors who come within the category of the Professional Client as defined in the Financial Conduct Authority’s Handbook. They are not available to individual investors, who should not rely on this communication. Information given in this document has been obtained from, or based upon, sources believed by us to be reliable and accurate although M&G does not accept liability for the accuracy of the contents. M&G does not offer investment advice or make recommendations regarding investments. Opinions are subject to change without notice. Reference in this document to individual companies is included solely for the purpose of illustration and should not be construed as a recommendation to buy or sell the same. M&G Investments is a business name of M&G Investment Management Limited and is used by other companies within the Prudential Group. M&G Investment Management Limited is registered in England and Wales under number 936683 with its registered office at 10 Fenchurch Avenue, London EC3M 5AG. M&G Investment Management Limited is authorised and regulated by the Financial Conduct Authority. JUL 19 / WIM2859

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. INVESTMENTS

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