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ESG principles

6 minutes read
Last updated on 28th Apr 2021

Prudential Assurance Company (PAC) is the asset owner for M&G plc and Prudential. Prudential, part of M&G plc, understands the importance of Environmental, Social and Governance (ESG) factors in investment decisions and their potential to materially impact our customer and investment outcomes. As long-term investors across our PruFund and Annuities businesses, we, in our role as an asset owner believe that businesses and behaviours that reflect ESG best practices, and which are aligned with our values of ‘Care & Integrity’, are better-positioned to deliver sustainable success over time horizons that meet present and future customer needs. You can read more about our core values of care and integrity in our Sustainability Report here.

Our ‘Long Term Investment Strategy Team’ already considers ESG risks at a geographic level when setting asset allocations, with regional ESG risks translated into asset class Risk and Return impacts that can result in an over or under allocation within the fund and performance benchmarks. Our ‘Manager Oversight Team’ assesses and challenges managers on their ESG ambitions in the manager selection and monitoring processes across new and existing mandates. As an asset owner we have previously thought of ESG risks in generalities and at macro level, but have grown to realise a more explicit and bottom up consideration of specific ESG matters is crucial to meet the increasing focus and demand of our customers, both current and future.

Our priorities

ESG and responsible investment encompasses much more than our stated priorities, and our ultimate ambition is to embed the consideration of ESG factors in all of our thinking, processes and products.

Climate Emergency

Of particular importance to Prudential is the Climate Emergency, which we recognise to be an existential threat to our planet, clients and business. In line with the Paris Agreement, M&G plc as a firm are aiming to achieve carbon Net Zero investment portfolios by 2050 across our aggregate investments, at the latest, and we are actively formulating a emissions-reduction investment strategy for our asset book.

Diversity and Inclusion

We’re also advocates of diversity and inclusion within corporate settings, with a strong belief that diverse and inclusive companies deliver financially and are better at managing risks. As a company, M&G plc have therefore committed to annual improvements in representation of gender and ethnicity/nationality diversity within our senior leadership, aiming for 40% women and 20% ethnicity/nationality by 2025. As part of our manager selection and monitoring process, we’re committed to evaluating each investment manager’s diversity policies and practices, which includes how an investment manager challenges its investee companies to improve and maintain diversity in their business models.

Modern Slavery

Another key aspect of our ESG policy is our Modern Slavery Statement. This outlines our commitment to ensuring that slavery, human trafficking, child labour and any other form of human rights abuse has no place in our organisation or supply chain. We  recognise that the breadth and depth of our investments, together with the complexity and opaqueness of supply chains, increases the risk that modern slavery may be encountered within our investee companies.

Our progress

Our preference is to invest in the solution and to actively steer our investee companies towards more sustainable practices. We work with Asset Managers who share our beliefs and principles, and rely on them to actively engage with our investee companies on our behalf to protect and enhance the long term value of our assets. As part of our manager selection and ongoing monitoring processes, we assess manager engagement processes and ensure they comply with the standards set out in Shareholder Rights Directive II and the UK Stewardship Code. However, we recognise that we can’t always affect the change we wish to see, and there are certain behaviours with which we do not wish to be associated. In such instances, we may exclude particular companies or industries from our portfolios. There are some funds for which we have no look through to underlying holdings, or where we are co-investors and thus have no influence over investee company engagement. Our ability to exclude extends to mandates where we own 100% of the fund, or a majority of the fund in some instances, and currently only applied to publicly issued debt and equity.

Investee company engagement:

Where there is a business or behaviour we wish to change and we believe we can influence that change, we will instruct our asset managers to engage on our behalf, specifying:

1.     The behaviour we wish to change  and the timelines over which we wish to see them;

2.     How we will monitor and measure progress;

3.     The consequences of not meeting our requirements.

Developing our policies:

When considering what position to take with respect to a particular business or behaviour, we consider:

1.     The contribution (positive and negative) the business or behaviour has on our customers, financially and in terms of wellbeing.

2.     The nature, permanence and impact of the business or behaviour;

3.     Whether there are inherent dangers linked to the business, or if a behaviour could be classed as accidental, negligent or deliberate;

4.     Whether there is a history of shortcomings in the industry or company practices;

5.     Whether we can influence the business or behaviour, or whether there are alternatives to the business or sector.

Our policies evolve from initial screening to recommending companies for either engagement or exclusion, with reliance on our asset managers to discuss with and request from us exemptions for companies for which there is greater nuance to their stories, e.g. coal companies that plan to exit coal or United Nations Global Compact (UNGC) violators who have committed to remediation. With both our values of ‘Care & Integrity’ and our priorities in mind, we’ve already implemented an exclusions list for companies linked to the manufacture and distribution of controversial weapons such as cluster munitions, anti-personnel landmines, and other weapons either banned by international treaties or considered to be disproportionately or indiscriminately cruel or harmful.

Our future

Further work is underway to improve on our ESG performance and reporting, while we may introduce additional policy positions with respect to other ESG-sensitive themes such as biodiversity depletion, water scarcity, oil and gas. These policies will be developed conscientiously and rigorously, accounting for relevant science, ESG and investment factors. We’ll also periodically review our existing positions to account for the latest research, and monitor our portfolios holdings to identify and address areas of concern.

We’ve also signed up to the UN Principles of Responsible Investment (UNPRI), which comes with specific reporting requirements around our investment processes, decision making and monitoring. Our membership will require us to report, demonstrate and attest to our commitment and adherence to the Principles of Responsible Investment.

These changes and workstreams represent important steps in incorporating ESG into all that we do, but will help enable us to meet the challenges facing our company and planet, so that we’ll be able to help meet our customers’ needs for generations to come.     

"Prudential" is a trading name of Prudential Distribution Limited. Prudential Distribution Limited is registered in Scotland. Registered Office at Craigforth, Stirling FK9 4UE. Registered number SC212640. Authorised and regulated by the Financial Conduct Authority. Prudential Distribution Limited is part of the same corporate group as the Prudential Assurance Company. The Prudential Assurance Company and Prudential Distribution Limited are direct/indirect subsidiaries of M&G plc, a company incorporated in the United Kingdom. These companies are not affiliated in any manner with Prudential Financial, Inc, a company whose principal place of business is in the United States of America or Prudential plc, an international group incorporated in the United Kingdom.