Initially driven by big pension funds in Australia, New Zealand, Europe and North America for various reasons, some political, fund managers are increasingly looking at how companies are handling the inevitable transition to a lower-carbon world as a risk-assessment tool.
Martin Currie Investment Management, for instance, which runs A$12 billion in Aussie equities, as well as A$11 billion in global, emerging markets and specialist equities strategies, has recently extended its carbon exclusion policy on its Ethical Income strategy and Ethical Income fund range available via Legg Mason Australia.
Martin Currie updated its partial exclusion policy in the Ethical Income funds from 20 per cent of EBITDA – meaning excluding companies which had more than that proportion of earnings from thermal coal – to full exclusion of companies directly involved in thermal coal production or distribution. According to Will Baylis, Melbourne-based portfolio manager who oversees ESG strategies in Australia and NZ, the move, on April 1 this year, followed consultation with clients and what the manager believes is market sentiment.
Baylis said in a client note last week that: “Through our investments, we continue to encourage and support companies who are transitioning to sustainable and renewable energy. Our portfolio is aligned to this process through our investments in dual-listed renewable focussed New Zealand integrated electricity utilities Contact Energy and Meridian Energy, who predominately use hydro or geothermal power.”
“These companies are ranked as high quality by our analysts based on their strong Environmental credentials, and above average business strength and market shares. This makes them appealing for the strategy from both an ESG and sustainable low-risk income perspective.”
The exclusion extension for the Ethical Income Fund meant selling out of Australian coal transport company Aurizon Holdings and NZ electricity generator Genesis Energy. The fund had already excluded Australian stocks such as AGL Energy, which is a big buyer of coal for electricity generation, and coal miner Whitehaven Coal.
Baylis says: “As we believe that ESG factors such as climate change risk and carbon footprint can increase or reduce the risk of companies not delivering the cashflows that our analysts have forecast, our investment process incorporates ESG factors directly into the Quality rating applied by our analysts, and where relevant, is factored directly into their cashflow forecasts.”
“The combination of earnings and quality adjustments can tilt our assessment of fair value on these stocks, and as such adjustments due to climate change risk may impact our decision to invest in these stocks.”
Martin Currie believes in direct engagement with companies to understand how they perceive the risks associated with the transition to a low-carbon-producing economy and what they are doing about it.
“A key question when the investment team is engaging with any company board,” Bayliss says, “is whether the company has a climate change policy and how it evaluates the risk of climate change.” For example, has says, the manager is comfortable that Woodside Petroleum is “one of the highest quality operators in the oil and gas industry” and that mitigating these risks is top of mind for the company’s management.
Greg Bright is publisher of Investor Strategy News (Australia)