How can better ESG behaviour benefit a company’s bottom line?

First of all, a company that is properly considering its material ESG risks is managing its downside better. Companies with superior governance who are managing their environmental and social risks thoughtfully are less susceptible to big, sudden downside shocks.

There've been plenty of examples of this over time. The types of ESG-related risks companies are subject to include increasing regulatory and legal requirements, financial, reputational and operational risk - all of which can affect cash flows, profits and even their license to operate. It's also about managing opportunities.

Forward-thinking companies with well-run business models that properly capitalise on transformative changes in the global economy can offer attractive investment upside as well as creating a positive impact.

There's a generational shift of assets occurring to an asset owner who is much more in tune with global challenges. There's also a gender shift underway, with women controlling an increasing proportion of assets."

What future trends do you see emerging in sustainable investing?

There’s an increasing level of sophistication with which managers who call themselves ESG have actually got to demonstrate what they're doing. Ongoing, it won’t be good enough to simply label yourself with those badges. You will have to prove how and why you're differentiating yourself in the space.

With that comes things like impact measurement and reporting, which is a trend that we're going to see more and more of down the line. There will also be increasing calls to action on engagement – using our influence to help change companies for the better and to work collaboratively within our industry to achieve this.

One of the other global trends is going to be the question of fiduciary duty – to what extent you have to consider ESG factors as part of your fiduciary duty. In the past, ESG was considered to be something that involved a trade-off in returns. There's been a very big mindset change, particularly in some of the more forward-thinking jurisdictions around the world, that it is actually an integral part of your fiduciary duty. This is on track to be written into various pieces of legislation and it’s a trend that's definitely not going away.

What advice would you offer to a manager wrestling with these issues on behalf of their members?

The first place to start is to be very clear on the ethical hard lines of their members – to really understand what their members do and don't want to invest in.

Have a clear position on topical issues like fossil fuels and climate change and clearly articulate the investment implications of what eliminating certain hard lines from the portfolio might mean. Then take it a step forward and educate the members as to what ESG integration means for investment value and drivers.

Explain that things could look very different in a resource-constrained future where there's much greater regulatory, legal and operational risk than there was in the past and what that potentially means for the value of their investments going forward.

Be discerning about the choice of investment managers, in terms of how thoroughly this is being considered in the various investment options. For example, consider whether there is only a screening process, or whether there is a much more active consideration of these factors. Be more proactive around things like engagement for positive change and investing for impact. Don’t just accept clever marketing - look in-depth at what the managers are actually doing, rather than simply ticking boxes.

In the past, ESG was considered to be something that involved a trade-off in returns. There’s been a very big mindset change."

How does AMP Capital’s approach to impact investing differ from other managers?

Impact investment in general, so far, has taken place via private markets. That’s led to some challenges in terms of it being fragmented and challenging to scale. These projects can be quite small and geographically dispersed. Because they're in private markets, not everybody has the capacity to invest.

AMP Capital is questioning what role public markets have to play in that, and whether using public market asset classes can really help to mobilise assets at a greater scale, and to have more positive impact. There are a number of ways you can have positive impact via public markets, which we have extensive experience in.

First of all, it's about choosing the right companies for your portfolio whose business models are absolutely intentional. This question of intentionality is a critical one. You have to look very carefully at the company's core capabilities, where the bulk of its revenue and profits are coming from, and to what extent that is actually addressing a sustainability challenge.

You can look at companies that are, for example, doing really great things in renewable energy, but it’s only five per cent of its business and the bulk is in fossil fuels. I personally don't view that as positive impact, whereas some of the products that are out there labelling themselves ‘impact’ do.

We’re quite lucky in that we've got some great resources and capabilities internally in AMP Capital in terms of identifying great companies that have this ethos built into the business model – and also present attractive investment opportunities.

Secondly, large asset managers are privileged to have significant power to create positive impact through voting and direct engagement — helping companies change their business models and practices for the better. This is something our team has been skilled at doing for over 20 years.

AMP Capital’s ESG team is now global – based in London, Wellington and Hong Kong, as well as Sydney. Why was that move made?

This has been a conscious decision. Because AMP Capital is globalising its investment offerings, it makes sense to be globalising our ESG capabilities alongside that. Furthermore, when we talk about sustainability issues and how to create positive impact, these are by their very nature global challenges, and there are great companies across the world taking steps to address them.

There's also a lot of opportunity, particularly in Asia, where the ESG field is generally quite underdeveloped and there’s a real lack of expertise on the ground. What we tend to find is that when something in Asia catches on, it catches on very quickly, and we're well positioned to be a significant player in the region when that happens.