Investing in response to climate change

By Kristen Le Mesurier
B Com, B Laws (Hons), M Laws Portfolio Manager - Multi Asset Group Sydney, Australia

Last week I was part of a panel at the Responsible Investment New Zealand Conference 2018 discussing investor responses to a changing climate. It was great to see this as a topic for discussion. I believe that investor-led action, and holding the companies we invest in to account, is critical to tackling climate change.

The financial sector, and institutional investors in particular, have an important role in the fight against climate change. Not only does it pose a major risk to economic growth; climate change threatens the homes and livelihoods of millions of people. The onus is on all of us – governments, business, communities and society – to work together to understand the impacts of climate change and take appropriate action.

Climate change is one of the most important issues to consider when constructing an ethical and ESG investment portfolio. Yet it seems there is no clear or consistent approach to thinking about climate change in the investment industry. In fact, there is a vast array of different approaches.

At one end of the spectrum, investors may deny that climate change is an investment issue and insist that any consideration in the investment process would mean sacrificing return – so would therefore be a breach of fiduciary duty.

At the other end of the spectrum, investors are so committed to avoiding any exposure, that they exclude all sectors in the fossil fuel value irrespective of the impact on returns, and construct portfolios that basically contain technology, healthcare and some financials.

And, of course, there are countless iterations in between.

From an investment perspective, the risk stems from two key areas. The first is the physical impact of climate change – for example, the impact of extreme weather patterns and natural catastrophes. Then there is the financial impact on companies as the world transitions to a lower carbon economy. This might include regulatory change, changing consumer demand, and/or the changing energy mix.

As a global investment company, AMP Capital believes climate change is an extremely important investment issue, and our commitment to climate change is reflected in the way we invest. We structure our ethical and responsible investment portfolios to account for the investment risk as well as engage with companies and policymakers for a better future. This filters through to the managers appointed to run mandates, with managers chosen who understand the investment implications of climate change and invest accordingly.

It also has a direct impact on the way our ethical and ESG multi-asset portfolios (the Responsible Investment Leaders range of funds) are constructed. For instance, a strong fossil fuel exclusion list has been developed to ensure managers do not invest in stocks materially involved in thermal coal, brown coal fired generation, oil sands and nuclear power. These exclusions are over and above the other exclusions we have committed to, including gambling, tobacco, alcohol and controversial weapons. This is a values call and reflects clients' desire not to have any exposure to stocks in these industries.

In addition, we invest in assets that are consistent in a world tackling climate change. In the infrastructure sector it means we invest in community infrastructure like schools and hospitals. In terms of direct property, managers are appointed who actively consider the physical impact of climate change and are prioritise energy efficiency.

We also actively seek to invest in assets that are working to make the world a better place. For example, currently we own more than 50 green bonds and require 30% of the corporate credit portfolio to be devoted to green bonds. We ask our equity managers to positively screen and invest in stocks that are aligned with a world that keeps temperature rises to 2 degrees Celsius, as was committed in the Paris Agreement.

Other initiatives include measuring and reporting on carbon footprinting and the way in which managers vote on shareholder resolutions on climate change. The risk of stranded assets – assets that unexpectedly lose value as a result of climate change – is another important consideration.

We have an ethics committee that is made up of clients, whose task it is to independently review responsible investment fund holdings to make sure managers are investing consistently with the mission to make the world a better place. This is backed up with a comprehensive engagement agenda, and clear and publicly stated goals for driving change.

At the same time, we actively collaborate with other large investors through a variety of industry initiatives to improve transparency and disclosure, and encourage responsible investment practices through the integration of ESG issues. For instance, AMP Capital is currently leading two important engagement programmes as part of the Climate Action 100+. This is an investor initiative now supported by about 300 of the world's largest investors, with more than US$30 trillion of assets behind it.

When it comes to addressing climate change, we believe the financial sector can make a big difference. Global investors have a responsibility to manage climate risk in existing portfolios and through new investment opportunities. As an organisation we recognise that climate change impacts our investments and are proactively engaged in climate change related investment management.

To find out more about our engagement on climate change refer to the latest Responsbile Investment Leaders Engagement Report 2018, or to learn more about responsible investing visit this section of our site.

Product Disclosure Statements (PDSs) for the offer of the AMP Capital Investment Funds have been lodged with the Registrar of Financial Service Providers. The Responsible Investment Leaders Diversified Funds PDS can be obtained from our website, and from the Disclose website www.business.govt.nz/disclose. The Manager and the Issuer of the Fund is AMP Investment Management (NZ) Limited, Meridian Building, Level 1, Queens Wharf, Wellington.

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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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