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Responsible Investing

Global Intent welcome news for investors

December 2021
Ganesh Suntharam
Chief Investment Officer & Senior Portfolio Manager
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The integration of climate risks and opportunities into portfolios is not an easy challenge for the investment teams who have been given the mandate to execute on this task.

This article first appeared in FS Super on 9th December 2021

An exciting level of progress is occurring in the grassroots of our economy in relation to climate change. This progress is being driven by committed entrepreneurs, industry-based not-for-profits, and corporate entities all looking to make an impact and, for all the negative headlines, the movement towards environmentally conscious change is well and truly underway.

An interesting illustration of this change was the initial public offering (IPO) of Rivian on the US stock market in early November 2021. Within just a few weeks of its IPO, it became the world's fifth-largest listed automobile manufacturer globally, ahead of brands such as BMW, Ford and GM. Even more interesting is the largest shareholder on its register is currently Amazon, which owns a 17% stake post IPO.

So, why does the world's largest online marketplace hold a 17% stake in one of the world's largest electric vehicle companies?

The answer originates from Amazon's desire to reduce its impact on global warming by reducing emissions throughout its supply chain. To execute on this objective, Amazon became an early investor in a technology that was developed to materially decrease emissions from the traditional fossil fuel-based transport system it used to deliver its packages.

Rivian is just one example of climate innovation. When we look across listed markets to companies like Beyond Meat and Orsted, which are developing new technologies to assist in the world's transition to a net zero economy, there is evidence to show that financial markets are helping entrepreneurs and companies create impactful change.

This level of development, on both public and private markets, is partly why some observers were left underwhelmed by the lack of political alignment at the start of the recent COP26. This was seen as an opportunity to validate the commitment and effort occurring at the grassroots level and inspire and support ongoing change in tackling the climate problem. If COVID has shown us anything, it is that political alignment, coupled with corporate might and human ingenuity, can help solve even the most difficult of problems.

Despite the initial slow progress, the joint declaration by the US and China and the subsequent Glasgow Climate Pact agreed by all parties during the extension of proceedings hopefully sets a good foundation for COP27 in 2022.

In particular, the US-touted "once in a generation" infrastructure bill and China re-committing to achieving net zero by 2060 are important declarations of intent that set the tone for ongoing investment by the world's largest economic powers.

With great progress being made from a technology perspective and the global intent to commit resources to the climate change problem, financial institutions are understandably transforming to ensure they are focused on disclosing and allocating capital to contribute to this change. This has resulted in a significant shift in the conversation around Responsible Investment (RI) over the last decade. Within the Australian superannuation sector, the driving force in this advancement has been the evolution in thinking around principles of universal ownership and stewardship.

This has led to superannuation funds and asset managers evolving from an awareness and appreciation of ESG to an endorsement of, and commitment to, the Principles of Responsible Investment (PRI), which includes the impact of investments on climate. Having endorsed these climate-related frameworks at a board or investment committee level, the baton has then been passed to the investment teams in these organisations to integrate these objectives into their investment portfolio.

The integration of climate risks and opportunities into portfolios is not an easy challenge for the investment teams who have been given the mandate to execute on this task. This challenge only increases in difficulty as recent regulatory changes around Your Future, Your Super (YFYS) reforms add an extra dimension to this challenge.

It requires investment teams to carefully consider active risk relative to a pre-specified benchmark and successfully balance the risk, return and responsible investment objectives. In many cases, the challenge of integrating responsible investment considerations is more efficiently captured within a single portfolio that balances the risk, return and responsible investment objectives collectively rather than as three individual portfolios targeting outcomes from each objective individually.

Although this challenge may be difficult, it also comes with opportunity. Renewable infrastructure companies are initial beneficiaries of this shift to a more climate-conscious economy given their ability to influence outcomes in our immediate day-to-day lives.

The availability of listed opportunities in this area continues to grow with greater availability to companies generating electricity through wind, solar, hydro and biomass fuel sources.

As the world continues on the transition to a net zero economy, these opportunities will also continue to extend to transport, electrification of the grid, energy storage, agriculture and, further along the supply chain, to industrial, resource and technology companies.

For financial institutions that can successfully balance these risks and opportunities, there is a net benefit to their investors, not just from a financial perspective, but also from a meaningful impact on the world's environmental future.

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