INVESTMENT – getting the big money behind sustainability

23 May 2017

The world of financial investment is increasingly reflecting the realities of our finite world. AMP Capital and Westpac talk sustainable investment trends with SBN.

The arcane short-term world of stock prices still dominates a lot of investment thinking. But these days anybody looking further than the next quarter must take into account the real world beyond the plate glass high rises. In 2017, that is a world in significant political and economic turmoil. It is inhabited by people increasingly concerned for the well-being of the natural world. They are also increasingly concerned about their personal well-being, quality of life and financial stability.

Kristen Le Mesurier is a senior analyst with AMP Capital. In a recent report she identifies a few of these ‘non-number’ issues among key investment trends to keep an eye on.

One example is climate change.

“The private sector is proactively preparing for a renewables-centric and climate change-resilient world,” she writes. “The continued focus on renewables and energy security will ensure that electricity prices and energy will remain heated discussions globally in 2017. This is likely to add to short term uncertainty for investors as well as utility and fossil fuel companies in the medium term.”

She also warns of greater scrutiny of supply chain ethics and attacks on the ‘social licence to operate’. This, she suggests, will be especially acute among companies unable to demonstrate that their goods and services are genuinely in the best interests of their customers.

Factors like this are often referred to as ESG factors – environmental, social and governance. AMP Capital has long factored them into its thinking. The company became one of Australasia’s first signatories to the Principles for Responsible Investment in 2007. It was also a founding member of the Investor Group on Climate Change and its Head of ESG Research, Dr Ian Woods, is the Deputy Chair. AMP Capital has been a member of SBN since 2014.

In its latest Corporate Governance Report, AMP Capital summarises ESG factors as:

  • Environmental factors: How likely is it that the value of a company in this sector will be influenced by how well it performs as a steward of the natural environment?
  • Social criteria: How likely is it that the value of a company in this sector will be impacted by how a company manages relationships with its employees, suppliers, customers and the communities where it operates?
  • Governance: How likely is it that the value of a company in this sector will be impacted by the quality of its leaders, the fairness of its pay structures, the audits and internal controls, and finally the rights of shareholders?

AMP Capital’s approach is that it is not prepared to deliver investment returns to customers at any cost to society. The company has developed an ethical framework for considering companies or sectors, that, under exceptional circumstances, it won’t invest in for ethical reasons.

Ian Woods is head of ESG Research for AMP Capital.  He says: “Investors are increasingly being asked to justify their actions. This has raised questions about the role of ethics in investing and whether it is defensible for investors to support an activity that, while commercially convenient, viable and legal, is inherently wrong.”

Kristen cited tightened government control on the financial sector in Australia as an example of how this is generating regulatory pressure.

“Investors are now asking questions about what companies are doing on some of these issues,” she says. “Activists are coming to AGMs and tabling questions. This sort of thing makes CEOs say ‘what are we doing on this?’ They want policies to respond. The community has expectations of them that are not just financial.”

This kind of thinking has also been displayed by Westpac recently. Last month the bank released a new Climate Change Position Statement and 2020 Action Plan.

Highlights include:

  • increasing lending to climate change solutions from $6 billion to $10 billion by 2020 and to $25 billion by 2030
  • limiting lending to any new thermal coal mines or projects
  • reducing the emissions intensity of Westpac’s involvement in the power generation sector
  • supporting customers committed to net zero deforestation by 2020, those that do not adversely impact High Conservation value forests or develop on areas of high carbon stock forest
  • continuing to advocate for a price on carbon.

The contentiousness of these issues is striking. A few years ago if you Googled ‘Boycott Westpac’ you would find environmentalists angry about Westpac providing banking services to Bathurst Resources as it planned to mine coal on the Denniston Plateau. Do that same search today and you will find similar calls led by Matthew Canavan, Minister for Resources and Northern Australia. He is angry Westpac’s new policy rules out the bank supporting the proposed giant Carmichael coal mine in Central Queensland and other similar projects in new mining areas.

But for Westpac this has been about consistently developing its response to climate change over the years.

Grant Fleming, Westpac’s head of external relations, says: “We have been following and caring about the issue of climate change for a long time. This is something that has evolved. In the 2000s we primarily focused on what we could do within our own operations. In the last five years we have been asking ourselves about the role we can play in the wider economy. That role in the economy is the big lever we can pull.”

In Decemeber the bank committed itself to ensuring it operated in a manner consistent with a ‘Two Degree Economy’ to ward off the worst effects of climate change.

Grant says: “We have looked at the opportunity side of that equation by increasing our exposure to clean tech investment and investment in climate change solutions. We see those as opportunities as they are only going to grow. Now we are taking a long hard look at the negative risk management side in terms of what are the activities that are detrimental to the planet.”

The bank is currently working on a New Zealand-specific version of the new policy.

Grant says: “There is a growing awareness of these issues. Investors are taking issues like stranded assets very seriously, especially when they see what has happened to some of the big coal companies recently. You certainly don’t want to be the last one holding the candle in situations like that.”

“We want our people, our customers and our communities to prosper. Our communities can’t prosper if they are being heavily impacted by climate change.”

Kristen has this advice for looking at your own investment decisions.

“It is useful to take a step back and think about what sectors and companies are best positioned for the medium to long term. Do they have a business model that takes into account social and environmental issues and changes in technology? Do they take into account the big picture? How well positioned are they for the world we live in today?”

Sam McGlennon, project lead – community, says: “The best investors are taking a long view and a broad view. They are redefining the value of companies they invest in according to what they give to society and how light their footprints are. Equally, the best companies are striving to deliver on that broad value. This virtuous cycle will continue, as the levers of the world of commerce yank us towards the chance of a better future for us all.”