ESG insights, ethics and engagement

By Rebekah Swan
Chartered Member of Institute of Directors (CMInstD) Managing Director / Head of Clients New Zealand

The latest Corporate Governance report from AMP Capital is a great example of ESG research and shareholder engagement in action. This comprehensive report goes beyond simply reporting on the basics and provides some fascinating insights into the environmental, social and governance (ESG) factors which influence investments and company value. Two articles in particular resonated with me – the discussion of long-term ESG trends, and applying an ethical framework to investing – so I have put together a brief overview of these topics to hopefully encourage you to read more!

ESG trends to watch

At any point in time, a complex web of trends is shaping industries, and studying these trends is an integral part of AMP Capital’s environmental, social and governance (ESG) research. The report details some of the key ESG trends we will be watching over the coming year.

Sugar is emerging as one of the most prominent investment risks for the global food and beverage industry. A long-term trend toward health and wellness is already limiting the growth profile of companies manufacturing and selling products with high sugar content, with some countries now responding with sugar taxes on soft drinks and restrictions around advertising to children.

Another emerging issue that is expected to gain traction in 2017 is the use of antibiotics in global food chains. As consumers become more educated about the potential health risks, reduced use of antibiotics will change cost structures and consumption patterns, affecting the growth and profitability of food and agricultural companies.

Disruption was one of the buzz words in 2016 and in 2017 we expect the first waves of technologies to impact. A new ‘digital’ world’ is driving rapid change, and businesses that have succeeded for decades may be unseated by innovative start-ups and tech companies or simply become disintermediated if they do not adapt. For example, driverless cars and Blockchain have the potential to be transformative technologies, while the trend of online retailers venturing into traditional bricks-and-mortar stores has implications for real estate investment.

In terms of climate change, the renewables momentum is expected to continue, with renewable energy capacity expected to nearly double from 2015 levels by 2021. This focus on renewables and energy security will ensure that electricity prices and energy will remain heated discussions globally in 2017.

Executive remuneration will also be in the spotlight in 2017, with increased investor focus on the components of executive pay, including the size and frequency of bonuses for chief executives and the performance hurdles attached.

New ethical framework

Is it okay to exclude companies purely on ethical grounds? AMP Capital’s Head of ESG Research, Dr Ian Woods, argues that yes, under certain circumstances it is okay, and goes on to discuss the philosophy behind AMP Capital’s new ethical decision-making framework.

It used to be that fund managers were discouraged, or even prohibited, from taking ethical issues into account when making investment decisions on behalf of their clients. But times have changed and so has society. AMP Capital has also had to adapt and change because we are not prepared to deliver investment returns to clients at any cost to society. More broadly, the exclusion of companies on purely ethical grounds reflects the changing attitudes of our clients who increasingly do not want to be invested in harmful products.

Key concepts that underpin the ethical framework include consideration of the degrees of harm caused and the ‘denial of humanity’ of another person. This new framework aligns the rest of our global business with what New Zealand investors are required to do by law already (regarding cluster munitions and landmines). What’s new for AMP Capital in New Zealand is that we will now divest from tobacco manufacturers as well. This is across all asset classes.

One thing to note is that, as a responsible investment manager, we still firmly believe in company engagement as a way to effect meaningful change. However, in the case of tobacco, cluster munitions, landmines, biological and chemical weapons manufacturers, clearly no level of engagement can override the inherent dangers involved with such products.

For a more in-depth reading on these two topics, along with our views on remuneration and gender diversity, and proxy voting statistics, I would encourage you to read AMP Capital’s latest Corporate Governance report.

Further information on AMP Capital’s responsible investment philosophy and range of responsible investment funds, is also included in the responsible investment section of our site.

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Important notes

This blog post has been prepared to provide general information and does not constitute financial advice in accordance with the Financial Markets Conduct Act 2013. An individual investor should, before making any investment decisions, consider the information available in the relevant Product Disclosure Statement and seek professional advice. While every care has been taken in the preparation of this document, AMP Capital Investors (New Zealand) Limited and the AMP Group (together, 'AMP') make no guarantee that the information supplied is accurate, complete or timely and do not make any warranties or representations in respect of results gained from its use. The information is not intended to infer that current or past returns are indicative of future returns. The views expressed are those of the author and do not necessarily reflect those of AMP. These views are subject to change depending on market conditions and other factors.

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