Investors seeking to achieve real change through their impact investment will find that the passive approach isn’t as effective as an active one, explained John William Olsen (photo), fund manager of the M&G (Lux) Positive Impact fund and the Global Sustain Paris Aligned Fund. While active management costs more, in the area of impact investment, it’s necessary, he argued.
“We don’t try to match the index or catch short-term trends or anything like that,” Olsen explained. “It’s proper investment and long-term investment.”
Olsen makes no secret of his negative take on passive investing in this area.
Not sensible
“The passive way of Paris-aligning a portfolio in my mind, it doesn’t really make a whole lots of sense,” Olsen said in an Investment Officer interview. “You’re basically churning out of companies with higher emissions and into companies with lower emissions to get there, you don’t really look at the underlying decarbonisation of the companies that you’re investing in.”
He explained that most passive funds align their portfolios by reference to the portfolio’s “weighted average carbon footprint”. “Then you as an investor say I’m going to bring down this portfolio footprint, year after year by 7 percent until we reach a very low emitting portfolio at the end, “ he said. “It doesn’t really tell you anything about how to do that.”
Another weakness of passive funds, he said, is there’s no opportunity to engage with the companies, “because you’re holding 500 companies and as a passive ETF, that’s not typically done.”
Paris-aligning
Olsen said M&G decided to take a different route based on investing in companies that are engaged in Paris-aligning themselves.
He explained that this ongoing element is vital to the strategy. “This is a process that’s going to happen over the next couple of decades, so you can always become better in your alignment, in terms of how you set your targets, how ambitious those targets are, how much you include in them, how well the strategy is built around your reaching the targets.”
“You can do a lot also as an investment, we can try and help push these companies towards further and further Paris alignment,” he explained. “It doesn’t mean that the company is necessarily bad to start with, it just means that we can keep keep improving them.”
Super-long term
Olsen described his portfolio as “very active”, holding 30 stocks for both funds. “And they are super-long term in nature, typically with a decade’s long view.” The total assets under management for the M&G team is 4.5 billion euros, of which 3.4 billion or 75 percent is in European or global Paris-aligned strategies.
The fund has held investments in firms such as ISS A/S (building maintenance services), a global facility services company founded in 1901 and the Bank of Georgia, the second-largest bank in the Republic of Georgia, since 2018. It has held shares in Kuehne & Nagel (transport & logistics), Alk-Abello A/S (pharmaceuticals), Electronic Arts (video games) and Visa (consumer credit) since 2019.
Paris-aligned mutual funds like Olsen’s have yet to face competition from the private market, “I was expecting for it to happen a lot sooner, because all of the asset owners were trying to do it.”
Private advantage
Private market firms have an advantage over funds like Olsen’s. “In the private space, you have a very direct influence on the companies that you’re investing in,” he said. “You can you can probably dictate more than then we can.”
The average turnover holding period in Olsen’s funds is eight years. Long investment holding means staying on board and working with the companies, he said.
“If you’re just renting a stock for for a quarter, so the chances of something bad happening or good happening … is relatively low,” he said. “If you want to hold on to it for a decade, it really matters.”
Higher fees
Olsen acknowledged that active management does involve higher fees, and raises the question of whether they’re justified.
“We have been able to beat the market pretty consistently on these strategies over time,” he proudly stated.
The work involved in active management is significant, he explained. He has a team of nine analysts working on the strategies reporting directly to him. On top of that, the firm also does carbon research, which is purely focused on the climate side.
“You have someone with very, very deep knowledge of that company, having conversations with the CEO, and in some cases, we know a lot more about this than the CEO would.”