Sustainable Investing 2021 Annual Report

Sustainable Investing

Michael W. Roberge

 

CHAIR, CHIEF EXECUTIVE OFFICER

 

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Society, our planet and our economy are changing profoundly, and the investment industry is changing alongside it, aiming to serve the growing number of stakeholders who are interested in sustainability. They are no longer focused solely on what level of risk-adjusted returns we are providing. They are now also interested in how we are providing returns. We are faced with the unique opportunity to step up as leaders, driving real world change that will be pivotal to our firm, our stakeholders and the industry.

 

At MFS, our view has always been that incorporating relevant ESG factors into our decisions is common sense — and as important to fundamental analysis as evaluating any other material factor. I believe that integrating ESG underpins our license to operate as an active investment manager and that what we are witnessing is going to redefine the role of the active investor. MFS is built for such change — built to be a value creator (not a value taker); to exert influence for long-term impact; to be a dependable partner that acts with integrity; to learn from, educate and challenge everyone in our industry to improve the system in which we operate; and to provide responsible ownership rather than simple exposure.

 

As I have met with clients and regulators recently, I have been keenly aware that the marketplace is deeply skeptical of investors who simply claim “integration,” and I’ve been aware that trust is low. It is also clear to me that ESG adoption is still in its infancy; there is much confusion about it and a need for more education. Greenwashing and the mass-commercialization of ESG that we have seen in the investment management industry is making life even harder for clients. We believe that transparency is the key to separating the truly sustainable investors from the herd. That is why we are publishing our inaugural TCFD-aligned report this year and are continuing to invest heavily in data, tools and technology to provide our clients with the transparency they deserve on these issues.

 

We also notice some pervasive industry narratives which we believe will be corrected as the industry matures, namely that

 

  • ESG is somehow a separate consideration to other fundamental factors
  • exclusion or divestment is the best way to evaluate an asset manager’s authenticity in regards to sustainable investing
  • to count, ESG considerations must result in a binary buy or sell outcome

 

We reject these narratives. Done right, the evaluation of material ESG factors is akin to our broader fundamental research. It is an area in which we can potentially develop an analytical edge and therefore could be valuable in delivering the best risk-adjusted returns we can to our clients. Simply put, integrating ESG into our fundamental analysis makes us better investors.

 

As stewards of capital in large, public markets, we feel that ESG strategies based on exclusion and divestment are misaligned with our clients’ objectives and our stated purpose of creating value responsibly. In fact, we believe that pursuing an exclusionbased approach would be an abdication of our responsibility — not the exercise of it. Instead, we choose to engage as proactive stewards of capital — to create the point of leverage on which we can move the world, influencing companies to manage for long-term value creation rather than short-term profit maximization, and encouraging them to pay close attention to social and environmental externalities that could incur material financial costs.

 

The prospect of those costs is real. As the Intergovernmental Panel on Climate Change (IPCC) said in its 2022 report: “The cumulative scientific evidence is unequivocal: Climate change is a threat to human well-being and planetary health. Any further delay in concerted anticipatory global action on adaptation and mitigation will [cause us to] miss a brief and rapidly closing window of opportunity to secure a livable and sustainable future for all.” As you will read in this report, we are treating climate change as a systemic risk and taking on the challenge of engaging with our companies to contribute to the future that we all want to see.

I am convinced that as long as we focus on doing the right thing for our clients over the long term, have the courage of our convictions and practice humility, MFS will play a leading role in how the industry, and particularly sustainable investing, evolves. It is in pivotal moments like these that organizations are tested — and I know we are more than ready for the challenge.

While climate risk is ubiquitous and critically important, social issues continue to come to the fore as well in equally urgent and dynamic ways. As I write this letter, we have just entered Day 15 of Russia’s invasion of Ukraine. Most important, this is an urgent humanitarian crisis involving a tragic loss of life and unimaginable destruction, and our first thoughts must be with the victims. But as investment managers, we know that our clients are anxious about the impact on the markets and are looking to partners like MFS for guidance. Helping clients navigate changing landscapes and stay focused on achieving long-term value is essential to what we do.

 

MFS has been through many turbulent times in its nearly 100-year history — from wars to recessions to the ongoing COVID-19 pandemic. Thankfully, the firm and investment platform we have built are designed to endure in times of uncertainty and to lead in times of change. And speaking of change, I believe the investment industry today is on the brink of a major transformation.

 

So while I recognize the enormity and complexity of the challenge ahead, I am very excited about how we are approaching it. And I am convinced that as long as we focus on doing the right thing for our clients over the long term, have the courage of our convictions and practice humility, MFS will play a leading role in how the industry, and particularly sustainable investing, evolves. It is in pivotal moments like these that organizations are tested — and I know we are more than ready for the challenge.

 

Michael W. Roberge
Chair and Chief Executive Officer

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