Climate change and ethical investing
The vision for ethical investing is simple: invest for the long term while making the world a better place. It’s noble and hard to argue with.
Implementing the vision, however, is not so easy.
The investing world is seldom black and white. Investors often face a decision choosing the lesser of two evils, or the better of two goods, rather than between good and evil. Every investment decision has consequences. Responsible investors think about the direct and indirect ramifications of every buy and sell recommendation.
For example, withdrawing money from a resources project on the back of political concerns has the potential to decimate a rural village in an under-privileged part of the world, condemning hundreds or thousands of people to poverty. Quitting investing in coal fired power generation and putting everything into renewables would, in the short term, literally result in the lights going out.
These are the sorts of conundrums ethical investors face every day. They have to balance the goal of making the world a better place with achieving acceptable returns. (Investing, by definition, includes achieving a return and when people put money into an investment, they expect the return to be financial.)
The best ethical investors have clear guidelines on how to work towards making the world a better place while also achieving a financial return. The AMP Capital Responsible Investment Leaders (RIL) funds are guided by three principles.
We invest in companies and managers at the better end of the spectrum on environmental, social and governance issues.
We believe part of our job is to lobby for change and expect all of our managers in Australia and overseas to share our philosophy.
We exclude companies and assets that have a significant negative social impact.
Environment, social and governance (ESG)
The environment, and specifically climate change, is arguably the biggest challenge facing the world today and we are committed to invest to help find solutions. But there is no quick fix or easy answer.
The AMP Capital RIL funds think about climate change using some key parameters.
Our first parameter is that we exclude all companies that make a material amount of money – more than ten per cent of sales – from the most carbon intensive fossil fuels. These are thermal coal, oil sands, brown-coal coal-fired power and the conversion of coal to liquid fuels or feedstock.
The second is that we do not invest in infrastructure companies that facilitate the most emissions intensive fossil fuels. For example, it means we do not invest in companies that own oil sands pipelines.
This approach to exclusion and divestment means that the Socially Responsible Investment Balanced option at AMP Capital has a significantly smaller carbon footprint than the markets we invest in. For example, in Australia, its carbon footprint is 50 per cent less than the ASX2001.
Our approach is to support the transition needed to address climate change. So, we still invest in some oil and gas companies which are best of breed in terms of environmental, social and governance impacts. This is the third parameter. It is not practical to stop investing in all energy and resource companies, even as we ramp up investments in companies that are helping economies transition to a renewable basis.
Gas in particular, is also expected to play a much more important role in providing energy to the world under a two degree temperature rise scenario (a two degree temperature rise by 2040 is the current goal contained in the Paris Agreement).
For example, the International Energy Agency2 expects that demand for natural gas will increase by 11 per cent under its most ambitious scenario, known as the Sustainable Development Scenario. Coal is likely to need to be replaced by renewables but natural gas will remain an important part of the global energy mix.
There are some fossil fuels that do not yet have a natural alternative. An example is the type of coal used to make steel (metallurgical coal) and oil used for transportation. Developing economies like China and India, who have not benefited from the full spectrum of fossil fuels like we have, will need some fossil fuels as they develop, bringing millions of people out of poverty.
Away from the environment (though often these issues are inextricably linked) are other important social and governance issues which ethical investors consider.
Rates of pay for labour in factories in parts of Asia remains an issue as does deforestation. Access to medicines – something Australians almost take for granted – is a major barrier for millions of people in both the developed and underdeveloped world. The use of plastics, the prevalence of antibiotics in the food supply and the rights and wrongs of investing in social media are all issues ethical investors, including AMP Capital, grapple with.
Lobbying for change
The biggest difference a fund manager can make in helping make the world a better place is to lobby for change and influence countries and companies to do things differently.
Large fund managers such as AMP Capital are in the privileged position of being able to encourage change. We do this by meeting with the executives and boards of the companies that we own and asking them to do things differently.
We have asked retailers to map and publish their supply chains and pay factory workers a living wage. We have asked banks to lift their game on responsible lending, address sales-based cultures and compensate customers who have been treated poorly. We have asked the world’s largest resource and utilities companies to map and disclose their path to a lower carbon economy.
Just as importantly, we appoint investment managers who ascribe to our philosophy and we take part in investor coalitions that call for change. This includes Climate Action 100+, a five-year global initiative designed to bring together the world’s largest investors and the world’s largest greenhouse gas emitters. To date, 320 investors responsible for more than US$33 trillion of assets under management have committed to the initiative.
Negative and positive social impact
While the environment garners much of the attention, there are other companies and sectors which many ethical investors avoid because they are inherently destructive and cause harm to people.
For example, the AMP Capital Responsible Investment Leaders Balanced fund does not invest in any companies that manufacture or produce:
land mines; or
other biological or chemical weapons manufacturers.
Nor does it invest in companies that make more than 10 per cent of their sales from alcohol, gambling and/or pornography. This is because of the social harm that the use of these products can cause.
Our position on nuclear power is clear: we exclude companies that make 10% or more of their sales from the production of nuclear power. The main reasons are; the potential for significant accidents, such as the Fukushima Daiichi nuclear reactors in Japan; and the unsolved problem of safe long-term nuclear waste disposal. (As we’ve seen in much of the western world there are also serious questions about the financial viability of nuclear power).
The flip side is the many opportunities to invest in assets that improve society and are constructive to people. Investing in schools and higher educational facilities, hospitals, water treatment and desalinisation plants, and even prisons focused on rehabilitation all fall into that category of ethical investing which will make the world a better place.
One of the most important ways we support companies and assets that are developing solutions to ESG challenges is by investing in green bonds. These are essentially loans, made by investors such as the World Bank or governments, for green projects all over the world. Projects that the Socially Responsible Investment Balanced option are funding right now include solar energy farms, energy efficient technology, energy storage solutions, sustainable transport, cycleways, recycling research and development and forestry plantations.
In Australia, one of the green bonds we bought in 2018 is funding a water recycling plant in New South Wales that is expected to save 18 billion litres of drinking water each year.
Another way we finance renewables is by investing in cleantech private equity. This way we provide early stage capital for companies developing the next generation of clean energy.
There are no easy solutions to the myriad of questions raised by investing ethically. A set of clear principles to guide investment decisions is the most practical and effective way of facilitating change. It is an evolutionary process, not a revolution, that will make the world a better place.
Portfolio Manager, Multi Asset GroupSydney, Australia
1 Calculated at 30 June 2018 by AMP Capital.
2 The IEA is an intergovernmental agency started by the OECD
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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