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Michael Blayney: How to take a multi-asset approach to sustainable investing

Investing in the energy transition aligns values and returns – but it’s best to take a diversified approach, argues Pendal’s head of multi-asset MICHAEL BLAYNEY

NO MATTER your opinion on climate change, there’s no doubt we’re undergoing an energy transition – a global shift away from fossil-based energy to renewable sources.

The evidence is in renewable power growth, electric car adoption, regulatory and policy change, public sentiment – and yes, investment trends.

There are two main reasons an investor might show interest in the energy transition: aligning a portfolio with their values and making money.

“For retail investors, the number-one issue that arises when you survey them is climate change,” says Pendal’s head of multi-asset, Michael Blayney.

“People care about plenty of issues, but climate change is number one.”

The second reason is to make money.

“This massive transformational change in the world is happening fast,” Blayney says.

“It started in Australia with solar rooftops and now you see plenty of Teslas driving the streets.

“The transition is very real and there’s going to be a massive amount of money spent on it.”

Approach to diversified sustainable investing

The bigger question is how best to invest in the energy transition.

It’s not simply about identifying innovative, listed companies with strong pricing power and a growing addressable market, Blayney says.

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Sustainable investors should also “participate across multiple asset classes as part of a broader diversified portfolio”.

That might include infrastructure or sustainable bonds for example.

A diversified approach to ESG

“You want to maintain a robust multi-asset portfolio that’s competitive with any sort of traditional, unscreened investment,” Blayney says.

“It makes sense to participate across multiple asset classes as part of a broader diversified portfolio.

“Just like you don’t put all your money into one asset class, investors shouldn’t put their whole portfolio into one thematic or indeed access a large thematic via only one asset class.

“Investors should consider gaining exposure across many asset classes.

“You can invest in companies that are providing products and services for the energy transition. It might be a manufacturer of wind turbines.

“You can invest in operators of the infrastructure that’s part of the transition economy. And it is worth having some exposure to battery storage opportunities, which is part of the transition.”

A risk-reward approach

All of these investments need to be undertaken using the normal risk-reward framework, Blayney says.

“The sun shines with lower volatility than the wind blows. So solar is slightly a less volatile income stream than wind in many geographies.”

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More generally, the typical portfolio construction principles apply — equities are the top end of the risk-reward spectrum, cash is at the bottom end and renewable infrastructure is somewhere in the middle, Blayney says.

Investing in renewable infrastructure also provides exposure to energy prices via the cash flows which is something normally lacking in other parts of a portfolio when ethical screens are applied.

In debt markets, green bonds provide exposure to the energy transition.

Pendal’s head of responsible investing distribution Jeremy Dean adds more options: “There’s lending money to corporates which have the specific goals of reducing their carbon emissions through increasing energy efficient of their operations.

“And there’s retail bank syndication processes which might fund wind or solar farms.”

Blayney says commodity futures also provide opportunities for energy transition investors, particularly if buying into specific companies has been screened out.

“There are some obviously structural trends. Copper is needed to electrify and a vast amount is going to be needed. That provides a structural demand tailwind,” Blayney says.

“One way to play that, in a small way, is through commodities futures which allows you to participate in some of the upside in commodity prices, which you might miss out if you screen them out of your equities.”

Blayney’s final word: “Ultimately it comes down to developing a well-diversified portfolio that’s consistent with the client’s risk profile.”

Dean agrees: “You can have a high-quality, risk-adjusted returns while playing the energy transition theme.

“There are multiple ways of doing that, but fundamentally it has to be about making money.”

About Michael Blayney and Pendal’s Multi-Asset capabilities

Michael Blayney leads Pendal’s multi-asset team. Michael has more than 20 years of investment management and consulting experience. He was previously Head of Investment Strategy at First State Super and head of Diversified Strategies at Perpetual.

Pendal’s diversified funds provide investors with a variety of traditional and alternative asset classes and strategies.

The team — which also includes Allan Polley — manages our multi-asset portfolios with a focus on strategic asset allocation, active management and tactical asset allocation.

Find out more about Pendal’s multi asset funds:

Contact a Pendal account manager here

This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current at June 22, 2023. PFSL is the responsible entity and issuer of units in the Pendal Multi-Asset Target Return Fund (Fund) ARSN: 623 987 968. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com.

The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested.

This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information.

Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance. Any projections are predictive only and should not be relied upon when making an investment decision or recommendation.

While we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections. For more information, please call Customer Relations on 1300 346 821 8am to 6pm (Sydney time) or visit our website www.pendalgroup.com

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