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Emily Woodland was running the peaks and forests of her adopted home Hong Kong, training for a 250km ultramarathon in the Gobi Desert, when she started questioning her traditional portfolio management career.

The UK-born finance graduate, who was posted to Hong Kong not long out of university, had been managing a long-short portfolio in an investment bank when she had the epiphany that short term, high-turnover trading didn’t sit right with her personal beliefs.

“As someone who is very outdoorsy and in tune with nature, I’ve always been very passionate about environmental issues,” she says. “I started to question the investment model we were following. I questioned why there wasn’t any accountability for the non-financial impacts of the companies that we were investing in.”

Emily took herself to evening classes to do a two-year master’s degree in corporate environmental governance at the University of Hong Kong, with the goal of finally marrying her personal beliefs with the investment world. The change ultimately led her to AMP Capital, where today she leads the sustainable investing team globally.

“I wanted to be a part of financial capital being used as a force for good – directing funding to companies that are doing the right and powerful thing.” And ultramarathons? “Whatever I do in life I do rather wholeheartedly,” says Emily, who finished as the 4th female and 17th overall that year in the Gobi Desert, and runs ultra-marathons to this day.

“I started running when I was at university and when I came to Hong Kong found its big trail running scene. I realised I was a lot better suited to running far rather than running fast.”

As someone who is very outdoorsy and in tune with nature, I’ve always been very passionate about environmental issues”

Why does sustainable investing matter and how should it be incorporated into portfolios?

It's important when you're talking about ESG to distinguish between morals and ethics, versus whether you think there is an investment-related case. Some people consider personal values as their main driver. But our team very much approaches this from the perspective that it also makes real investment sense to consider ESG factors in your decision-making process.

We're looking at an increasingly resource-constrained future facing off against burgeoning populations; we've got systemic issues such as climate change, data security and the relentless abuse of human rights. Any businesses that are properly factoring these considerations into their operations are managing their downside risks better, and potentially taking better advantage of the associated opportunities. And they are more likely to outperform, because these types of non-financial factors and externalities are going to become more prevalent and priced into organisational cost bases going forward.

Conversely, companies that aren't building those constraints into their strategy are likely to increasingly lag their peers that do. Therefore, if you are not considering these factors in your investment process, you're actually doing your clients a significant disservice.

Why is sustainable investing growing so fast around the world? What kind of problems are portfolio managers trying to solve?

The term ESG is exploding globally, but there's a bit of confusion as people struggle to wrap their heads around the growth and what it really looks like.

Ethical investing - which is saying ‘these are my values and these are the sectors or companies I don't want to invest in’ – has been around in various forms for a long time. But it's upping the ante now. It used to be things like tobacco or gambling and now it's starting to move into questions like ‘what are we doing about animal welfare or fossil fuels?’ These kind of exclusionary tactics – where people omit entire sectors from the portfolio – are growing a lot. You're seeing a lot of passive solutions out there taking the global universe and then chopping out certain sectors or activities and calling that ESG.

That’s not really how we view ESG. We go the next step along the spectrum and view ESG and sustainability factors as significant, intangible drivers of company value. You need to have a proper way of integrating that into how you value a company over the long term. That's an investment consideration rather than only an ethical consideration. There are different degrees of how well that is being done globally. 

Another style approach which is growing rapidly is sustainability-themed investing, which allows investors to align their portfolio with a particular theme, such as water, energy efficiency, medicine, education or agriculture.

The next stage along the spectrum receiving increased attention is impact investing. That's investing in companies or projects making an intentionally positive contribution to environmental or social issues, where the business model revolves around presenting a solution to a sustainability-related challenge and the impact of these efforts is measured and reported.

What’s driving the underlying demand?

More and more people want to see their investments not only doing well for themselves, but also doing good for society and the planet.

With the advent of social media and increasing amounts and speed of information available, people are much more aware now of sustainability-related issues. Civil society is starting to demand more action and holding companies to account for their impacts.

It’s also partly a shift in the underlying asset owner. 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.

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.
 

Important Notes

While every care has been taken in the preparation of these articles, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in them including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. Performance goals are merely goals. There is no guarantee that the strategy will achieve that level of performance. The information in this document contains statements that are the author’s beliefs and/or opinions. Any beliefs and/or opinions shared are as at the date shown and are subject to change without notice. These articles have been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. They should not be construed as investment advice or investment recommendations. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

Edition 2 - Article 2

5G: A revolution is dawning

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