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Environmental Social Governance (ESG)

Accelerating ambitions on climate change to underpin next investment cycle

By Adam Kirkman
Head of ESG Sydney, Australia

If anyone had been left in any doubt about the implications of climate change policies on investment returns, then the past six weeks should have convinced them otherwise.

Coinciding with the Biden Administration’s virtual climate summit in April, the United States1, European Union2, Japan3, Canada4 and the United Kingdom5 announced ambitious new targets to reduce greenhouse gas (GHG) emissions, including shorter timeframes.

The Group of Seven (G7) has agreed to stop direct government support including international financing for thermal coal power projects6.The European Union said it was moving close to agreeing on a levy for jet fuel7. Additionally, financial regulators around the world are also moving toward introduction of the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations, including stress testing and reporting requirements for corporations and investment firms.

These changes bring forward decisions about climate change into the investment cycle out to 2030. This is most prevalent in markets where long-term policy signals and targets are being established by governments. Fund managers must make decisions on behalf of clients recognising climate change considerations form an important and essential part of their fiduciary obligations.

Globally, 2020 was a seminal year for climate change. The COVID-19 pandemic has delivered emissions reductions through restricted economic activity. It has provided an unprecedented opportunity for governments and regulators, funds and investors to consider, and achieve, rapid and more sustainable change as part of a COVID-19 economic recovery.

A convergence is emerging between investor demand, capital allocation and government policy. European governments and funds lead the way, but other regions such as Japan and North America are now making great strides forward and at pace.

US President Joe Biden has said combating climate change is an essential element of US foreign policy and national security8. The US has officially re-joined the 2015 Paris Climate Agreement9. In March, President Biden’s American Jobs Plan included more than US$200 billion for affordable and sustainable housing and more than US$170 billion for electric vehicles10.

In Australia, the 2020 AGM and proxy season saw several new shareholder resolutions around emissions targets. Significantly, proxy advisers have started to vote in favour of these measures11. This has also fuelled meaningful and more sophisticated engagement with companies about the urgency of climate change and transition planning for a low carbon economy.

Our own engagements reveal many investee companies share the view that climate change is now cemented as a key financial consideration when contemplating what is ultimately best for clients, customers and the community.

AMP Capital’s ESG specialists engage with large companies and assets, seeking reductions in GHG emissions, development of clear transition strategies, enhanced climate-related disclosures and resilience to physical climate risks. Where they are not considered to be making necessary progress over time, we may review our investment position to align with our client’s long-term interests.

We have also met with energy, materials, utility and finance sector companies setting out expectations regarding climate policy advocacy, particularly through industry associations. We want the companies we invest in to work constructively within their own industry organisations and spheres of influence to shift the dial in mitigating climate change impacts.

Globally as an active member of the Climate Action 100+ (CA100+) investor collaboration we are bringing a unified investor voice to dialogues with the world’s most carbon intensive businesses on climate change issues. CA 100+ expects companies to undertake rigorous TCFD-aligned disclosures, stress testing and scenario analysis across their operations.

Our firmwide position on climate change recognises the transition to a low carbon economy is now well and truly underway. Meeting the Paris Climate Agreement commitments will ultimately require significant decarbonisation across all sectors of the economy. We believe it will create compelling investment opportunities in climate mitigation, adaptation as well as new asset classes.

AMP Capital is committed to managing our business and client investments toward achieving net zero emissions by 2050 or sooner in line with the Paris Climate Agreement. With our global expertise in infrastructure debt, infrastructure equity and real estate we are providing clients access to lower carbon investment opportunities including cleaner energy, sustainable water, transport and built environment solutions, that help in the push toward carbon neutrality.

Indeed, our Real Estate division, through its 2030 Sustainability Strategy is demonstrating such ambitions are attainable now with select funds and assets, already achieving net zero targets, years ahead of plan. We have also worked to ensure our ethical leaders fund range avoids significant exposure to fossil fuels.

Across our managed portfolios, we are aiming to reduce carbon intensity (e.g. TCO2e/$mAUM) over time, and setting interim targets (e.g. 2030, 2040) informed by new policy developments and further scenario analyses. Supported by ESG and sustainability specialists, our investment teams are working to integrate climate risks and opportunities in our decision-making across all asset classes.

We believe it’s ultimately about developing a deeper understanding of climate risks and opportunities that will impact the value, performance and reputation of the investments we make on behalf of our clients. Our role as a global investment manager is to try to make the best climate-informed investment decisions possible, to mitigate risk and provide access to new compelling investment opportunities at scale.

For more information on AMP Capital’s Position on Climate Change, please read further here.

1. https://www.whitehouse.gov/briefing-room/statements-releases/2021/04/22/fact-sheet-president-biden-sets-2030-greenhouse-gas-pollution-reduction-target-aimed-at-creating-good-paying-union-jobs-and-securing-u-s-leadership-on-clean-energy-technologies/
2. https://ec.europa.eu/clima/policies/strategies/2030_en
3. https://www.reuters.com/business/environment/japan-government-propose-new-target-cutting-greenhouse-gases-by-46-nikkei-2021-04-22/
4.https://pm.gc.ca/en/news/news-releases/2021/04/22/prime-minister-trudeau-announces-increased-climate-ambition
5. https://www.gov.uk/government/news/uk-enshrines-new-target-in-law-to-slash-emissions-by-78-by-2035
6. G7 Climate and Environment: Ministers’ Communique, London 21 May 2021:  https://www.gov.uk/government/publications/g7-climate-and-environment-ministers-meeting-may-2021-communique/g7-climate-and-environment-ministers-communique-london-21-may-2021
7. https://www.ft.com/content/bdacdcd5-4e7b-491e-8621-bddabd208be5
8. The White House: FACT SHEET: President Biden Takes Executive Actions to Tackle the Climate Crisis at Home and Abroad, Create Jobs, and Restore Scientific Integrity Across Federal Government
9. The White House: Paris Climate Agreement
10. The White House: The American Jobs Plan
11. https://www.smh.com.au/business/companies/we-will-take-action-investors-target-asx-s-climate-laggard-directors-20210423-p57lv5.html https://www.theguardian.com/australia-news/2020/apr/04/almost-half-of-all-shareholders-at-santos-agm-back-stronger-emissions-target

 

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Adam Kirkman, Head of ESG
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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.

 

This article is not intended for distribution or use in any jurisdiction where it would be contrary to applicable laws, regulations or directives and does not constitute a recommendation, offer, solicitation or invitation to invest.

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