Investment in the companies which are addressing today’s sustainability challenges doesn’t have to mean sacrificing returns and can present some great opportunities for the long-term.

By Tatjana Greil Castro, Portfolio Manager and Archie Beeching, Director of Responsible Investment at Muzinich & Co.

At the start of 2020, before the world was plunged into chaos by a once-in-a-generation health crisis, the demand for more sustainable investment strategies was greater than ever.1 Some shorter-sighted investors may see the economic fallout of COVID-19 as an opportunity to push ESG to one side.

But as we turn our attention to jump-starting the economy, we must not lose sight of potentially far greater concerns – among them climate change and critical biodiversity loss – both of which have even greater potential to impact human health and the global financial system.

As retail and institutional investors reflect on their present situation, corporate resilience, the treatment of workforces and what we deem to be truly «essential» in life, we expect sustainability to become more of a must-have feature in all investment strategies.

ESG Must Be More Than a Label

With increasing demand, we also expect rising scrutiny of asset managers to ensure ESG strategies run deeper than just a label, and rightly so. It is natural for opinions on what ‘sustainable’ actually is to vary, and there are clearly many ways to achieve the same goal, but we believe any such investment strategy should carry some key features.

At its heart, an investment team needs to have a deep understanding of companies in their universe, and how sustainability challenges can impact corporate credit strength for better or worse. That should be reflected in the value placed on a security and ultimately their investment decisions.

Better Understanding

Investors should also be able to demonstrate some degree of stewardship in their interactions with portfolio companies, to encourage more sustainable corporate outcomes. Without such engagement, investors have no voice and will struggle to fully understand how a portfolio company is managing sustainability risks.

As a corporate credit specialist, we believe that being a lender of capital and not an owner should not prevent us from actively engaging companies – particularly when it comes to better understanding how companies plan to manage the big challenges like tightening emissions regulation.

Best-In-Sector Approach

In addition to these approaches, for a fund to display an ESG label with confidence, we believe its holdings should, at least in aggregate, show a considerably different ESG ‘profile’ to the investment universe from which they are selected.

Beyond exclusions that screen out industries and behaviors we believe to be fundamentally unsustainable, like controversial weapons or employing child labor, we also believe a best-in-sector approach is one of the best ways to achieve this goal.

In our view, this means setting a high threshold – not simply screening out companies with the very poorest ESG records, but favoring businesses that demonstrate leadership in their management of ESG risks relative to their sector.

Increased Focus on Climate Change

Finally, we believe the scale and all-encompassing challenges that climate change poses, means that it requires particular attention beyond the norm. The threat to livelihoods, critical infrastructure, our food systems and other life essentials can no longer be ignored.

While fossil fuel companies are understandably framed as the villains by many, it is easy to forget that greenhouse gas emissions are embodied in virtually all aspects of life. We believe any approach to climate risk should, therefore, be multifaceted.

Worrying Times

As with other ESG issues, we aim to integrate physical and transitional risks presented by climate change into credit analysis, to engage companies on their emissions and related business risks (and disclosures of those risks), to exclude the heaviest emitters and to encourage and support the most carbon-efficient.

These are worrying times indeed, but in crisis, there is always opportunity and creating a cleaner, more sustainable economy presents one of the greatest opportunities to investors in decades.

Tatjana Greil Castro has been a Portfolio Manager at Muzinich & Co since 2007. She manages the Muzinich Enhancedyield Short-Term strategy and the Muzinich Bondyield ESG strategy.

Archie Beeching has been Director of Responsible Investment at Muzinich & Co since 2019. He joined from the UN-supported Principles for Responsible Investment where he spent seven years.

1 Morningstar as of February 4, 2020: Record-Shattering Year for Sustainable Investments

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