Return expectations for fixed-income investments, as with other assets, increasingly include environmental, social and governance factors — particularly those related to the impacts of climate change. The strong momentum from economic, regulatory and social forces toward a more sustainable future will continue to affect asset pricing, making climate-aware portfolios a necessity for institutional investors. Brian Funk, head of global credit research at MetLife Investment Management, explains how identifying issuers who can transition to a climate-aware and sustainable business more quickly than their peers leads to numerous alpha opportunities.
Pensions & Investments: What investment opportunities do ESG and sustainability present?
BRIAN FUNK: First and foremost, our focus is to find strategically well-positioned companies, whatever they do, whatever world they exist in and wherever they do it. But all else being equal, companies that are being more thoughtful around the transition to clean energy — and reflect that in how they deploy capital and invest in their future operations — are more likely to trade at higher multiples five to 10 years from now.
We believe that factoring in ESG and accounting for sustainability are positive influences on relative credit spreads — especially for issuers that are in what we like to call the “hard-to-abate sectors,” such as power generation, steel, cement and commodities that are dug out of the ground. There are a lot of interesting opportunities for value creation and alpha generation among those companies that are proactively retrofitting and positioning their businesses for an impending different environment.
Asset owners, asset allocators and asset managers are in a unique position to assess and understand that climate transition is happening and that navigating it is influencing the way capital is allocated. We’re mindful of both risk and opportunity as they pertain to climate transition. As fixed-income investors, our immediate response is to evaluate and manage risk, but in that process we see opportunity over the coming decades.