How ESG adds to investment insights

Analysing an asset’s environmental, social and governance (ESG) attributes has become a mainstream part of the investment process. The driver for the integration of ESG into mainstream investment processes has been primarily to minimise material ESG risk. But as the ESG discipline has matured, different investors have started to approach it in different ways. As a result, fund managers such as AMP Capital have enhanced their ability to tailor investment funds to their specific needs and risk appetites.

Investors such as not-for-profit organisations that wanted to avoid “sin” sectors such as gambling, alcohol and weapons were some of the first groups to prompt fund managers to consider the impact ESG has on assets’ risk and return profile.

Then, in the 1970s and 1980s, heightened social consciousness prompted fund managers to broaden the sectors they were unwilling to invest in, such as uranium and nuclear weapons.

More recently, rather than simply excluding certain companies and sectors from their funds, many investors have taken a more proactive approach to ESG investing, selecting high-performing assets that make a positive contribution to society. There’s also a growing appreciation that analysing an asset’s ESG qualities gives a more rounded appreciation of a company’s tangible and intangible value.

How we approach ESG

We see ESG materially impacting the markets in which many companies operate, providing either headwinds or tailwinds to the company’s earnings growth. ESG analysis is also used to assess how well the company is managing the intangible assets needed to successfully execute the company’s strategy. Below are some examples:

• Environmental

Climate change challenges are now a fundamental investor concern. AMP Capital searches for companies that are addressing this by actively reducing their contribution to greenhouse gases and a warming planet.

Rail is an example. AMP Capital is an investor in rail assets that help to reduce travellers’ reliance on more emissions-heavy transport modes such as air travel. The resultant drop in carbon emissions has a positive effect on the environment.

• Social

Social considerations span many areas, such as how companies contribute to their communities. AMP Capital looks for investments that make a positive contribution to society.

The communications sector is an example. AMP Capital invests in companies that own mobile phone towers, investments that have helped facilitate the widespread technological change that helps support the smooth running of society.

• Governance

AMP Capital looks for investments whose managers are dedicated to maintaining them and securing their longevity. Transparency is an important aspect of governance because it improves visibility and trust in the company’s strategy.

For example, for assets such as tollway infrastructure, visibility over the way tariffs are paid, and returns are earned, is paramount.

One size does not fit all

Investors are becoming more engaged in the assets they own and want to see their values reflected in their management. In particular, younger investors are increasingly interested in investment funds that value ESG considerations.

As such investment managers such as AMP Capital have developed the capability to tailor funds so certain investments and sectors are represented – or not – in portfolios. Additionally, it’s possible to co-design funds to meet investor needs, for instance developing funds for investors that wish to reduce their carbon footprint or exposure to fossil fuels.

This focus on ESG is likely to strengthen over time, which will give investors even more tools to analyse an asset’s risk profile and potential to generate returns.