Q&A - MetLife Investment Management: ESG and what it means for asset managers

The race to decarbonisation has prompted a drastic overhaul of how business is carried out in almost every sector one can think of, to a point where the term ESG has become entrenched in every aspect of daily life. The need to adopt sustainable practices is one aspect that every sector, both public and private, agrees on.

What ESG entails, however, is anyone's guess. It is now synonymous with almost every aspect of investing, from mortgages to multi-billion-pound infrastructure and renewable energy assets, even coal mines, believe it or not.

Lately, all eyes are on institutional investors and asset managers to see how they navigate the wild west that is ESG compliant investing in a marketplace where the rules seemingly change and evolve quicker than fast fashion. Some appear to navigate this space better than others.

inspiratia sat down with MetLife Investment Management's (MIM) head of infrastructure debt platform for EMEA, Annette Bannister (pictured right), to discuss all things ESG and the platform's approach to sustainable investing.

Like most asset managers, MIM is increasingly incorporating sustainability metrics with regard to new investments and has recently strengthened its ESG stance with the acquisition of Affirmative Investment Management (AIM).

How does MetLife Investment Management deploy debt within the sustainable infrastructure space?

MetLife Investment Management (MIM) manages around $34bn in infra debt globally, and over $12 billion of this is European-focused and managed via the London office. Across EMEA, we focus mostly on the UK and Europe, but we also have a little exposure in the Middle East.

Our approach to sustainable investment centres around balancing traditional investing principles, primarily on the credit side of things, with the incorporation of relevant, financially material ESG factors and engagement to create strong risk-adjusted returns and improve long-term outcomes.

We incorporate ESG factors into our strategy because, we believe, over the long term these have an impact on the credit quality of an asset. Essentially, we don't want to invest in something that is at the risk of becoming a stranded asset.

Our approach to sustainable investment across infrastructure debt begins with a robust assessment of the material risks and the opportunities as part of our fundamental investment due diligence and monitoring.

For a portion of our sustainable infrastructure debt investments, we look at three key pillars that aim to support UN SDGs, which then define the type of assets we target.

The three pillars are:

• Low carbon transition
• Utility security
• Protecting and connecting communities

How has the acquisition of Affirmative Investment Management (AIM) shaped MetLife Investment Management's investment into the sustainable infrastructure sector?

The acquisition has certainly enhanced things from a sustainability standpoint. We have historically had a legacy of responsible and green investing within MIM but the acquisition of AIM and integrating the business has been a big step in advancing our verification and reporting capabilities.

As part of the acquisition, a dedicated team of AIM professionals who joined MIM began supporting our private capital team and have helped shape our approach to sustainable and transition financing. We now have deeper capabilities to engage clients on ESG-related topics and more capacity to assess various ESG risks.

We work on deals together but lean into our respective areas of expertise. My team will analyse the financial information, and our new sustainability colleagues scrutinise the ESG side of things. The team from AIM has a strong background in environmental science and carbon accounting which is a benefit for MIM and creates a formidable platform in terms of what we are able to offer in the sustainable infrastructure space.

How does ESG factor into the investment strategy of MIM?

This will depend on the transaction and on the portfolio that the asset is intended for. If it is a dedicated sustainable infrastructure portfolio, the infrastructure and ESG-focused team members will work closely together because our sustainability research colleagues would have to do an independent analysis of the ESG risks of the transaction. We evaluate a wide range of factors when making investments, but financially material ESG factors are a key consideration. After evaluating ESG risks, it is a pass or fail, and if the asset fails, it will not be eligible to go into that portfolio.

How did the acquisition drive MIM's ESG targets?

ESG considerations are something we have incorporated into our analysis for a long time. In fact, all the credit memos our team prepares have a dedicated ESG section in them. So, this has been happening for many years really, but with the addition of our private credit sustainability research team, this has become an enhanced process.

We now gather considerably more data on ESG metrics, and this is something we developed in collaboration with our new colleagues.

Are there any sectors that MIM prioritises over others?

We do not necessarily prioritise some sectors over others. Broadly speaking, we are primarily an investor in investment grade, fixed rate debt and as such, we have been investing in those sectors which support those characteristics. When looking across recent deal flow, we have seen quite a lot of opportunities in certain sectors that fall within our three-pillar focus. For instance, we have seen a lot more activity in the digital infra space which falls under our connecting and protection communities pillar.

The rise in the activity within the digital infra sector can be attributed to the Covid-19 pandemic, which has made us realise how important it is to do what we do right now, to be able to communicate via digital media to keep things running. In this sector we have seen an increase in deal flow across fibre, mobile towers and data centres.

We have also been involved in a few renewables deals but we are very selective as the sector is quite competitive, especially in Europe, with a lot of liquidity made available by commercial banks. The deals we participated in were bilaterally negotiated, where we had more control over how the transaction is structured.

What about data centres? Does MIM have a preference between edge and hyperscale facilities?

Across the data centres sector, we have invested in hyperscale ones. This has very little to do with the nature of the data centre and is more about the bankability and tenor of the loan.

With the smaller edge facilities, we tend to see multiple offtakers involved in the deal, which comes with more risk in terms of contract renewals.

Does MIM have a geographical focus within Europe and UK?

We invest globally, and we look for specific opportunities which we think offer the best risk-adjusted returns. There are no hard rules, however, there is a sovereign overlay which we incorporate into our analysis.

We have done a fair amount in the Nordics and Western Europe but have also invested in Southern Europe and Eastern Europe. Oftentimes, our evaluation of a geography depends on the underlying asset. If the asset relies on some sort of government support, or there is some form of regulation that is necessary to get us comfortable with the performance of a credit, then we would be more mindful of looking at how historically either governments or regulators have acted in those jurisdictions.

It can be challenging if, in the past, there have been retroactive changes to regulation or to support that was promised.

Do you notice any prevailing trends in the broader Infra space?

When looking across infrastructure markets, we think the deal flow in the digital sector will continue. Same with mobile towers and FTTH. And there is also a huge potential for sustainable transportation. We see a lot of potential for providing capital for areas like rail transportation. This is something we have been invested in for a long time.

With European governments pushing for less dependence on road transportation, rail transport will continue to see increased investment. Trains produce lower emissions than the equivalent road transportation like cars and heavy goods vehicles. We have seen quite a few opportunities to finance and support electric rail rolling stock.

In general, we are seeing more and more issuers making improvements to their operations which will result in ongoing opportunities for asset providers in transportation, social and digital infrastructure sectors.

On the topic of sustainable transport, what is MIM's view on EV charging infrastructure?

We have not been involved in any EV deals ourselves. From our perspective, it is not yet an established space and therefore carries a lot more risk than what we would be comfortable with. Since we are primarily looking for investment-grade transactions, anything that has an element of "build it, they'll come" makes it challenging from an investment-grade perspective.

For something like EV chargers, it is easy to see that we need them, particularly in residential areas. But the challenge from a financing perspective would be to see wholesale opportunity and working out whether or not that demand is sustainable.

So, Hydrogen is out of the question then?

Similar to EV charging, hydrogen is a super interesting sector, but once again, we think that current opportunities are challenging from an investment-grade perspective.

Finally, does MIM's approach to sustainable infra differ from that for other asset classes?

At MIM, we invest across a range of investment strategies and asset classes. And when looking across even the private capital spectrum, fundamentally we would always have to be comfortable with the credit risk for a certain transaction. Sustainability is an important element, and we work closely with our private credit sustainability research team, but as fantastic as something may look from a sustainable angle, it still has to make sense from a credit perspective as well.

So, when we are looking at transactions, we are looking at how long we should be able to lend for and it is very much driven by the credit profile of an asset. Client preferences and portfolio parameters also come into play. We manage money for a wide range of third-party clients who have their own parameters like maximum maturity, minimum credit profile, etc. Certain clients are more focused on sustainability considerations than others.

Having said that, our clients are increasingly pushing for greater disclosure of ESG metrics. Based on what we hear from our third-party clients, the increase in sustainability considerations is very noticeable in terms of demand and the types of metrics investors are asking for. This trend is more pronounced in Europe and I think it is going to continue to grow as we talk about sustainability more and more with clients.