MetLife’s investment management arm, MetLife Investment Management (MIM) has acquired Affirmative Investment Management’s (AIM) for its capabilities in impact investing. The move comes at a time when ESG-themed investing is becoming unpopular in the US, and impact investing is being viewed (despite alignments) as an alternative approach.
Growth and geographic expansion may not appear to be the primary reasons for MetLife Investment Management (NYQ:MET), with $590.9 billion in assets under management (AUM), buying AIM (AUM of $1.12 billion).
AIM uses a proprietary methodology, which incorporates ESG assessments, to manage fixed income portfolios that it claims generate positive environmental and social impact, without compromising financial returns.
Complexities and lack of standardisation associated with ESG investing is creating a backlash, which may give impact investing a boost. Estimates from the International Finance Corporation (IFC) on the share of global AUM of impact investing (2%) relative to ESG (30%)
Based on AUM alone, the deal can hardly be looked at as one that drives growth or expands market share. MIM’s sustainability report describes its approach to sustainable investing as being heavily ESG influenced, which may be detrimental to its position as a leading manager of public and private fixed income, and real estate investments in the U.S.
The current backlash against ESG investing in the US has resulted in several states banning large financial institutions from operating there, based on their anti-fossil fuel bias. Republicans have turned their anti-ESG stance into a battle cry to combat what they call a ‘woke capitalism’ agenda that the left is forcing on corporations.
Synergistic approach to sustainable investing adds to deal rationale
The global bond market is estimated to be around $110 trillion and the OECD predicted in 2017 that by 2035 annual issuance of the impact bond market could reach $620bn-720 billion, with a total market value of $4.7-5.6 trillion. Rapid growth in the market in the last couple of years suggests this might be outstripped.
AIM itself is focused on growing that impact bond market. AIM’s proprietary approach to sustainable investing involves a three-stage process including verifying the universe of potential impact investments, constructing and managing a portfolio from that universe, and reporting on the positive impacts of the portfolio to investors.
A core part of this method is engagement with issuers to ensure the quality of impact measurements, and also engaging with the stakeholders in the market to promote standards-setting and transparency.
MIM believes active engagement is the key to managing investment risk, and is also looking to educate issuers, improve disclosure, and provide feedback on the resulting impact. The main difference is largely in integrating ESG metrics (and jargon) to qualify its investment choices, which some in the industry argue does not help manage for positive sustainable impact.
Both firms also specialise in investing in fixed income, which adds further synergies to the deal.
ESG label becoming a ‘four-letter word’ in sustainable investing
Protests against the complexity and inconsistencies involved in ESG investing had begun even before republican-led states began their pushback to protect fossil fuel and other climate unfriendly industries. A lack of harmonisation of reporting standards, leading to disparity in ESG ratings for the same asset class are among the reasons to pushback increasingly stringent regulations,
Regulators, in turn, have had to respond to concerns over greenwashing, amid the explosive growth in ESG investing, which has seen assets under management burgeon to account for 30% of the global total.
In comparison, impact investing is seen as a more transparent option to sustainable investing. Impact investment strategies aligned with the UN’s Sustainable Investment Goals (SDGs) for example, allow investors to match their preferences to desired sustainable outcomes.
MetLife’s exclusionary screens may place it in the anti-ESG firing line
MetLife has not been named in any of the lists of banned financial services companies, but it does use exclusionary screens to avoid investment in certain companies and industries. These include the automatic and controversial weapons industry, tobacco, mining and utility companies deriving more than 25% of revenues from thermal coal, and companies that hold at least 20% of their oil reserves in oil sands.
Texas and West Virginia are the two states that have banned banks that engage with sustainability concerns. A recent study suggests borrowing costs in Texas could rise due to a smaller pool of banks competing for the same business, with a potentially higher cost of capital, resulting in higher interest costs.