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AMP Capital has been made aware that persons using the names AMP Capital Limited and AMP Capital Investors Limited Company are purporting to be a part of the AMP Capital or AMP group and are making unsolicited contact with members of the general public in Europe and the UK. AMP Capital Limited and AMP Capital Investors Limited Company are not part of the AMP Capital or AMP groups. Please ensure that you carefully establish the identity of any person or entity purporting to act for AMP Capital or AMP. 

 

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Environmental Social Governance (ESG)

Impact Investing: Making money from making the world a better place

By Dr Ian Woods
Co-Head of Sustainable Investment Sydney, Australia

Client expectations of the environmental, social and governance (ESG) impacts of Australian companies in their investment portfolios are changing fast, according to Dr Ian Woods, Head of ESG Investment Research at AMP Capital.

“In order to succeed, investors need to show that incorporating ESG issues into their investment process leads to their portfolios having ESG characteristics that are superior to those of the index over the long term,” Woods told a recent AMP Capital Insights Forum.

Client priorities are by no means uniform. Woods points out that: “clients are increasingly asking for comparisons between their funds and the ASX200 as a whole; this might be from the perspective of its carbon footprint or corporate governance profile.”

Investment managers such as AMP Capital that are signatories to the United Nations Principles for Responsible Investment are committed to:

  • Incorporating ESG issues into investment analysis and decision-making processes
  • Being active owners and incorporating ESG issues into ownership practices and policies

This requires investment managers to be seen to be active owners, which requires voting at company annual general meetings on board and shareholder resolutions.

“Managers must go beyond this and be able to show an ongoing process of engagement with boards and executive management teams in order to contribute to positive ESG outcomes,” says Woods.

One example of this was the Australian power generator AGL. Following engagement with AMP Capital and other investment managers as well as the proposing of a shareholder resolution, it pledged to close all its existing coal-fired power stations by 2050. It is now the largest ASX-listed investor in renewable energies.

“Investment managers that are able to show that they are at the forefront of thinking about how the industry can deliver superior ESG outcomes whilst generating market returns (or above) are more likely to build a compelling market proposition” argues Woods. “A good way to demonstrate this is by creating and sharing thought-leadership content on an ongoing basis,” he adds.

However, ESG-focussed clients are no longer satisfied that their investments simply do no harm to society or the environment. Instead, Woods explains: “clients are demanding that the delivery of market returns also be accompanied by specific social or environmental outcomes”.

This fast-growing part of global asset management is known as Impact Investing:

Growth of impact investments in Europe
Growth of impact investments in Europe - Source: European SRI Study,(2016)

This is illustrated by the growth of ‘Green Bonds’ over recent years. These are debt instruments that offer similar returns to regular bonds, but are used to finance assets or projects that are crucial to addressing environmental challenges such as climate change. This typically involves the same types of issuers that are active across the wider fixed income market.

Annual green bond issuance by issuer type (as of October 2017)
Annual green bond issuance by issuer type (as of October 2017) - Source: Bloomberg and World Bank data

“The bond proceeds provide the issuer with a quarantined pool of funding that supports its delivery of a specific outcome, such as developing wind farms or constructing houses with five-star energy ratings” explains Woods. “Alternatively, the bond might support the provision of education services, especially in circumstances where there is a supply shortage.”

Another high profile example of this trend is the C$287 billion Caisse de dépôt et placement du Québec pension fund; it has announced plans to invest C$8bn into low-carbon technologies.

“The concept is in its early days and is still a small part of the market, but we are already seeing it crop up in client mandates” observes Woods. “We expect it to be a strong growth area over the next few years.”

“The bond proceeds provide the issuer with a quarantined pool of funding that supports its delivery of a specific outcome, such as developing wind farms or constructing houses with five-star energy ratings” explains Woods. “Alternatively, the bond might support the provision of education services, especially in circumstances where there is a supply shortage.”

Another high profile example of this trend is the C$287 billion Caisse de dépôt et placement du Québec pension fund; it has announced plans to invest C$8bn into low-carbon technologies.

“The concept is in its early days and is still a small part of the market, but we are already seeing it crop up in client mandates” observes Woods. “We expect it to be a strong growth area over the next few years.”

  • Insights
  • Investment Insights
  • Responsible Investment

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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