Guy:
- Ok as usual and as the podcast name suggests, let’s “Cut to the Chase”, and let me get right to what I think is the heart of the matter for our discussion, and then we can move to unravel it a bit later.
- For many asset managers ESG, Sustainability, Impact investing, and such, is clearly a hot area of focus, with strong momentum. And to be fair, there are some who consider it, shall I say, “a necessary evil”, driven by new regulations or reporting requirements, and there are others, who give it focus, simply because they believe it is the right thing to do.
- My sense though during our conversations over the last several weeks is that part of your job is to turn observations and empirical work on climate and climate-related new technologies and apply them – to make them - part of your fundamental bottom-up analysis with the goal generating alpha opportunities.
- I believe I have that right - can you elaborate and comment?
Jim:
- I think your characterization is correct. Asset managers, like us, do extensive bottom-up research and analysis to get a sense of a company’s future revenue and cash flows; and then decide what the appropriate credit spread should be based on that analysis. For most asset managers, this has been the basis of security selection.
- At MIM we believe that type of analysis today cannot be complete without considering the impacts of climate change. And, as you mentioned, we must account for the enormous trends in sustainable investing, whether it be in the trillions of dollars earmarked in this matter or for new forms of regulations and reporting.
- Of course, as you mentioned, not everyone has a desire to integrate ESG into their portfolio, but for clients that do, we can do that. And by incorporating ESG factors into our investment process, my colleagues at MIM and I, believe we end up with many alpha generating opportunities that can capitalize on shifting climatological, technological, and regulatory patterns.
Guy: Do you think your alpha, or outperformance comes from merely avoiding companies with, say, high green-house-gas emissions, or those who are might be involved in other unsavory behavior?
Jim:
- It’s possible. And that is what is known as “negative screening” -- which is only a small part of what we do. We prefer companies who are actively taking steps to decarbonize. Finding those names can hopefully unlock value.
- But it is a more complex process than that simple metric, because “Negative screens” are typically a snapshot in time and backward looking. They are often rigid metrics that removes any judgement-based context and yield only binary outcomes.
- Positive selection, on the other hand, is forward looking and allows judgement to be made based on the direction an organization is traveling. We like to say that positive selection is about finding those companies who are “changing forward faster”. We believe if you can identify names that are incorporating such efforts into their strategy and operations, the business is probably worth more than their current spreads may imply, which could ultimately lead to improved performance over time.
Guy: That makes sense. So, how do you do that? What’s the secret sauce?
Jim:
- Therein lies the challenge…It’s different for different industries. Some companies might have a large portion of fixed assets that are subject to physical risks of extreme weather along with the difficulties of transitioning to newer and cleaner technology.
- With that in mind, I’d say one thing we look for with those companies is to see if they are finding clever ways to try and shield themselves from acute and chronic physical risk factors AND see if they are attempting to anticipate forthcoming regulations, legislation, and innovative technologies.
Guy: When you say “anticipating” that sounds consistent with your comment earlier about “changing forward faster”. Yet, I’d say it seems a bit abstract to me. How best do you identify those companies?
Jim:
- You are correct, it is often abstract and that is also part of the conundrum. Doing proper due diligence might still often opaque results. Sometimes the right questions are hard to find, and supporting data can be questionable and volatile.
- To get around this though, we believe it is important to place a heavy degree of emphasis on engagement with the corporate borrower to learn what those companies are doing, what the management teams are thinking, and what their goals and objectives are regarding their carbon footprint.
- As part of our building a “climate-aware portfolio”, it is vital to learn if they are putting capital and organizational systems behind these goals and objectives, thereby showing real commitment…. or are they just paying lip service to the value of decarbonization.
Guy: Let me see if I can tie a few things you said together. Fundamental bottom-up analysis must incorporate climate-related risks in order to be complete and comprehensive, correct?
Jim: We believe so, yes.
Guy: And companies that take precaution against climate physical risk and anticipate new regulation or legislation, should in your opinion either maintain value better, or increase value over time - is that correct?
Jim: That is correct.
Guy: I have found that there are some people who truly believe that incorporating climate variables leads to negative alpha? How would you respond to them?
Jim:
- My team and I would respectfully disagree. On the contrary, we believe for the reasons I mentioned earlier that it is a rare opportunity to drive alpha in a portfolio.
- To me there is no question that global warming, climate awareness and ESG initiatives are having a tremendous impact on how trillions of dollars of capital are being allocated and in turn how issuers are being valued. It seems that those issuers and countries who proactively participate in the journey to a “greener” future will be rewarded.
- And we believe those managers, like us, who monitor, identify, and invest with them will generate commensurate outperformance.
Guy: Jim, that is a great place to stop. Thank you for taking the time to share your vision and speaking with me today.
Jim: Thank you.
Disclosure
This material is intended solely for Institutional Investors, Qualified Investors and Professional Investors. This analysis is not intended for distribution with Retail Investors.
This document has been prepared by MetLife Investment Management (“MIM”)1 solely for informational purposes and does not constitute a recommendation regarding any investments or the provision of any investment advice, or constitute or form part of any advertisement of, offer for sale or subscription of, solicitation or invitation of any offer or recommendation to purchase or subscribe for any securities or investment advisory services. The views expressed herein are solely those of MIM and do not necessarily reflect, nor are they necessarily consistent with, the views held by, or the forecasts utilized by, the entities within the MetLife enterprise that provide insurance products, annuities and employee benefit programs. The information and opinions presented or contained in this document are provided as the date it was written. It should be understood that subsequent developments may materially affect the information contained in this document, which none of MIM, its affiliates, advisors or representatives are under an obligation to update, revise or affirm. It is not MIM’s intention to provide, and you may not rely on this document as providing, a recommendation with respect to any particular investment strategy or investment. Affiliates of MIM may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives) of any company mentioned herein. This document may contain forward-looking statements, as well as predictions, projections and forecasts of the economy or economic trends of the markets, which are not necessarily indicative of the future. Any or all forward-looking statements, as well as those included in any other material discussed at the presentation, may turn out to be wrong.
All investments involve risks including the potential for loss of principle and past performance does not guarantee similar future results. An investment in the strategy described herein is speculative and there can be no assurance that the strategy’s investment objectives will be achieved. Investors must be prepared to bear the risk of a total loss of their investment. Risks associated with the strategies discussed herein must be considered prior to investing. These risks may include, but are not limited to Liquidity Risk, Interest Rate Risk, Credit Risk, Prepayment Risk, and Counterparty Risk For a more complete list please contact your sales representative. In addition the use of Leverage has the potential to magnify both gain and losses within a portfolio.
In the U.S. this document is communicated by MetLife Investment Management, LLC (MIM, LLC), a U.S. Securities Exchange Commission registered investment adviser. MIM, LLC is a subsidiary of MetLife, Inc. and part of MetLife Investment Management. Registration with the SEC does not imply a certain level of skill or that the SEC has endorsed the investment advisor. This document is being distributed by MetLife Investment Management Limited (“MIML”), authorised and regulated by the UK Financial Conduct Authority (FCA reference number 623761), registered address Level 34 One Canada Square London E14 5AA United Kingdom. This document is only intended for, and may only be distributed to, investors in the EEA who qualify as a Professional Client as defined under the EEA’s Markets in Financial Instruments Directive, as implemented in the relevant EEA jurisdiction. The investment strategy described herein is intended to be structured as an investment management agreement between MIML (or its affiliates, as the case may be) and a client, although alternative structures more suitable for a particular client can be discussed.
MIMEL: For investors in the EEA, this document is being distributed by MetLife Investment Management Europe Limited (“MIMEL”), authorised and regulated by the Central Bank of Ireland (registered number: C451684), registered address 20 on Hatch, Lower Hatch Street, Dublin 2, Ireland. This document is approved by MIMEL as marketing communications for the purposes of the EU Directive 2014/65/EU on markets in financial instruments (“MiFID II”). Where MIMEL does not have an applicable cross-border licence, this document is only intended for, and may only be distributed on request to, investors in the EEA who qualify as a “professional client” as defined under MiFID II, as implemented in the relevant EEA jurisdiction. 1 MetLife Investment Management (“MIM”) is MetLife, Inc.’s institutional management business and the marketing name for the following affiliates that provide investment management services to MetLife’s general account, separate accounts and/or unaffiliated/third party investors: Metropolitan Life Insurance Company, MetLife Investment Management, LLC, MetLife Investment Management Limited, MetLife Investments Limited, MetLife Investments Asia Limited, MetLife Latin America Asesorias e Inversiones Limitada, MetLife Asset Management Corp. (Japan), MIM I LLC and MetLife Investment Management Europe Limited.
For investors in the Middle East: This document is directed at and intended for institutional investors (as such term is defined in the various jurisdictions) only. The recipient of this document acknowledges that (1) no regulator or governmental authority in the Gulf Cooperation Council (“GCC”) or the Middle East has reviewed or approved this document or the substance contained within it, (2) this document is not for general circulation in the GCC or the Middle East and is provided on a confidential basis to the addressee only, (3) MetLife Investment Management is not licensed or regulated by any regulatory or governmental authority in the Middle East or the GCC, and (4) this document does not constitute or form part of any investment advice or solicitation of investment products in the GCC or Middle East or in any jurisdiction in which the provision of investment advice or any solicitation would be unlawful under the securities laws of such jurisdiction (and this document is therefore not construed as such).
For investors in Japan: This document is being distributed by MetLife Asset Management Corp. (Japan) (“MAM”), a registered Financial Instruments Business Operator (“FIBO”).
For Investors in Hong Kong: This document is being issued by MetLife Investments Asia Limited (“MIAL”), a part of MIM, and it has not been reviewed by the Securities and Futures Commission of Hong Kong (“SFC”).
For investors in Australia: This information is distributed by MIM LLC and is intended for “wholesale clients” as defined in section 761G of the Corporations Act 2001 (Cth) (the Act). MIM LLC exempt from the requirement to hold an Australian financial services license under the Act in respect of the financial services it provides to Australian clients. MIM LLC is regulated by the SEC under US law, which is different from Australian law.
1 MetLife Investment Management (“MIM”) is MetLife, Inc.’s institutional management business and the marketing name for subsidiaries of MetLife that provide investment management services to MetLife’s general account, separate accounts and/or unaffiliated/third party investors, including: Metropolitan Life Insurance Company, MetLife Investment Management, LLC, MetLife Investment Management Limited, MetLife Investments Limited, MetLife Investments Asia Limited, MetLife Latin America Asesorias e Inversiones Limitada, MetLife Asset Management Corp. (Japan), and MIM I LLC.
Unless otherwise noted, none of the authors of the articles on this page are regulated in Ireland.
