Environmental Social Governance (ESG)

How to think about climate change

By Kristen Le Mesurier
Portfolio Manager, Multi Asset Group Sydney, Australia

There are few more polarising topics in global investing than climate change. Some investors don’t believe in climate change and believe that any consideration of it in an investment process means sacrificing return. That’s a breach of fiduciary duty, they say.

Other investors are so committed to avoiding any exposure to the ill effects of climate change that they exclude all sectors connected to fossil fuels, irrespective of the impact on returns. They construct portfolios that basically contain technology, healthcare and some financial stocks.

So how should an investor think about climate change?

Most importantly, it should be considered as part of investment decisions. Science shows that climate change poses a major risk to economic growth and threatens the homes and livelihoods of millions of people.1 Not considering these impacts would mean ignoring the potential impact on share prices and investment returns.

Where an investor arrives on the climate change spectrum is very relevant to portfolios.

The two key investment risks of climate change

At AMP Capital, we believe climate change is an extremely important investment issue. We have decided to structure our Responsible Investment Leaders range of funds to account for the investment risk in climate change, as well as engage with companies and policymakers to advocate for climate change to be addressed.  

We consider the key climate change investment risks stem from two areas:

  1. The physical impact of climate change; for example, the impact of extreme weather patterns and natural catastrophes.
  2. The financial impact on companies as the world transitions to a lower carbon economy. This might include regulatory change, changing consumer demand or the changing energy mix. 

We choose managers who understand these investment risks and invest accordingly. 

Climate change also has a direct impact on the assets we choose to invest in and how much we allocate across these assets.

Our approach

At AMP Capital, our Responsible Investment Leaders portfolio reflects the direct impact climate change will have.

  • We have developed a strong fossil fuel exclusion list so we don’t invest in stocks materially involved in thermal coal, brown coal fired generation, oil sands or nuclear power. This is a ‘values’ call and reflects our clients' desire not to profit from companies in these industries.  
  • We invest in assets that are consistent with a world tackling climate change. In infrastructure, we invest in community infrastructure like schools and hospitals. In direct property, we appoint managers who are actively considering the physical impact of climate change and are prioritising energy efficiency. We haven't invested
    in hedge funds or high yield credit, nor have we invested in standard private equity funds because we prefer assets that are supporting the solutions to climate change. In this context, we have invested in a US-based private equity fund that invests in clean technology and a sustainable agriculture fund in Australia.
  • We actively seek to invest in assets that are working to make the world a better place. In fixed income, we own more than 50 green bonds. We directed our fixed income manager  to devote 30 per cent of the corporate credit portfolio to green bonds in 2016.
  • We are measuring and reporting on the carbon footprint of our funds.
  • We are measuring and reporting on the way in which our managers are voting on shareholder resolutions on climate change. 
  • We have an ethics committee that is made up of clients whose task it is to independently review the holdings of the funds to make sure the managers are investing consistently to make the world a better place. 

We are also running comprehensive engagement agendas on the issue of climate change and state our goals very clearly and publicly. We are targeting:

  1. A clear path to a lower carbon economy, as quickly and sensibly as possible.
  2. Clear commitments and disclosures from companies on their path to lower emissions. 

Where we can work with other large investors and asset owners to achieve our goals, we will. AMP Capital is leading two important engagement programs as part of the Climate Action 100+, an investor initiative now supported by about 300 of the world's largest investors with more than US$30 trillion of assets behind it. 

Our commitment to climate change is reflected in the way we invest. 

1 United Nations’ Intergovernmental Panel on Climate Change, Global Warming of 1.5 degrees, October 2018

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Important notes

While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article 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.

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