Approach to Responsible Investment

Team Climate Change Statement

Climate change is the most material ESG theme affecting our investment strategy. In the utilities space, attempts to reduce carbon emissions has significant implications for the way in which electricity is generated, transmitted and distributed. Renewable energy is currently experiencing a virtuous cycle of falling costs, improving productivity and growing market share. In contrast, non-renewable energy is in a vicious cycle of declining market share, reduced revenues and rising costs.

Large-scale capital investment in renewables is being led by large cap, publicly-listed electric utilities. The replacement of uneconomic, older coal-fired power stations with wind and solar power is likely to present substantial capex opportunities for many utilities over coming years. Looking ahead, climate change also has material implications for energy pipelines, which could face stranded asset risk; and freight railways, whose coal haulage volumes may decline further.  

We seek to understand the risks associated with climate change by capturing them in our proprietary Quality Ranking model. We have identified 25 criteria that we believe influence stock returns in general and infrastructure securities in particular – several of which are relevant to climate change. A score is assigned to each criterion. The Quality Ranking of each stock is then combined with its Value Ranking, to provide an overall ranking of the securities we cover. This overall ranking is the focus of our stock selection and portfolio construction process.

One of the key frustrations facing investors seeking to deploy capital in an informed way is the subjective nature of the information provided by many companies on environmental matters. We have lobbied US utility companies including Southern Company, Alliant Energy and Evergy Inc on this issue. We encourage them to disclose to the Edison Electric Institute (which represents all US investor-owned electric companies) a set of consistent and easily comparable environmental, social and governance metrics. We hope that continued engagement on the topic of improved disclosure will bear fruit, helping us to make better informed decisions relating to climate risk.

In December 2017 we launched the First State Sustainable Listed Infrastructure Fund. This Fund was developed as a result of our team’s fundamental belief that a focus on sustainability is integral to reducing risk and achieving positive long term return outcomes. It seeks to invest in infrastructure companies that are positively positioned to benefit from sustainable development. The Fund builds on First State’s investment expertise in listed and unlisted infrastructure, including a 10+ year track record within the global listed infrastructure asset class. It also complements First State’s wider commitment to Responsible Investment across its fund range.