AMP Capital Corporate Governance Report zeroes in on disruption in financial services and how to assess a portfolio’s climate change risk

Not for release or distribution in the US

Driverless cars, the sharing economy and blockchain are three of the top sources of disruption for Australia’s insurance and diversified financial services sector, according to AMP Capital’s latest Corporate Governance Report. 

Disruption is an integral part of AMP Capital’s environmental, social and governance (ESG) research into Australian companies.  The way companies position themselves for change provides ESG analysts with unique key investment insights.

AMP Capital’s analysis of the financial services sector found the five companies in the sector with the highest ESG scores outperformed the five companies with the lowest ESG scores every year over five consecutive years. 

AMP Capital Corporate Governance Manager Karin Halliday said: “Disruption is proving to be one of the buzz words of 2016 across all sectors but we have been considering the impact of disruption on our portfolio for a number of years.   Businesses that have succeeded for decades will become unseated by innovative start-ups and tech companies if they don’t adapt to rapid change.

“Our deep dive confirmed the potential impact to insurers from driverless cars and the sharing economy is large. Interestingly, we found if automation technology reduces car collisions to the extent expected, motor premiums may fall by up to 54 per cent without impacting insurers’ margins.  This neatly demonstrates disruption in action: it can bring opportunities as well as challenges.” 

While there has already been much discussion about blockchain’s potential to disrupt the payments system, the potential for capital markets has only just started to be explored.  The report notes potential benefits from the use of blockchain in capital markets such as more visible and verifiable dark pools; permanent, time-stamped, transparent records of all transactions and trades; and the automation of post-trade processes.

This edition of the Corporate Governance Report also investigated how investors are managing climate change risk in their portfolios almost a year after the Paris Climate Change Agreement.

There are three main climate change risks that manifest themselves in equity and corporate bond portfolios:

• Impact on company valuations as a result of policies to reduce the greenhouse gas emissions of companies (and their value chains) within a portfolio.
• Impact on company valuations of fossil-fuel producers and distributors as a result of policies to reduce greenhouse gas emissions.
• Impact on company valuations from the physical impacts of climate change.

AMP Capital has undertaken significant work on all of these issues, most recently analysing the impact on company valuations for its equity portfolios and how best to communicate the greenhouse gas exposure of investments to clients. 

Ms Halliday said: “We’ve found investors must first understand their greenhouse gas exposure of the companies but adding up all of the emission figures without careful consideration may lead to a risk of double or triple counting the same emissions, which would artificially inflate the portfolio’s assessed level of exposure.

“There is also a need to carefully choose the context in which investors are considering these emissions.  Given investors’ exposure is a function of their investment, it makes sense to consider emissions in the context of a company’s market capitalisation rather than a company’s revenue.”

AMP Capital’s analysis has found the potential exposure for investors in the MSCI World index was 134 tonnes of carbon dioxide per million dollars of company market capitalisation or 0.134 tonnes of carbon dioxide per $1,000 invested in the MSCI World Index as measured on an equity share of emissions basis.   Four sectors – utilities (41 per cent), materials (21 per cent), energy (18 per cent) and transportation (6 per cent) – make up the bulk of the index’s exposure.

For investors in the ASX 200, the exposure was 130 tonnes of carbon dioxide per million dollars.  While investors in the MSCI Emerging Markets Index are estimated to have an exposure of 373 tonnes of carbon dioxide per million dollars due to greater exposure to emission-intense sectors.

The AMP Capital Corporate Governance Report also provided an update on the progress made with regards gender diversity, global corporate governance insights and an overview of AMP Capital’s proxy voting and engagement activity. 

For financial year 2015/16, AMP Capital submitted votes on 1388 resolutions at 272 company meetings.  Of these resolutions, 91 per cent were supported.  AMP Capital either voted against or specifically abstained from voting on 9 per cent of resolutions.

 AMP Capital submitted votes on 237 remuneration reports.  In total, 86 per cent of reports were supported.

The Corporate Governance Report can be downloaded at: www.ampcapital.com/about-us/esg-and-responsible-investment/corporate-governance