Promoting Sustainability Through Integration and Engagement.
Assessing sustainability factors is an integral part of our investment process. To construct our investment universe or opportunity set, we firstly screen the global universe of listed equity securities for infrastructure companies. The process aims to focus our research on companies where infrastructure is the primary driver of fundamental valuation, and the predictability and stability of cash flows meet investors expectation of core infrastructure. As a result, this screening process excludes companies for:
Prior to stock selection, we seek to exclude companies and regions with exposure or quality concerns.
Once an investable universe has been determined, we do not explicitly exclude infrastructure companies that exhibit poor sustainability characteristics. Instead, we assess the sustainability risk and opportunities associated with each company in its investment universe.
Our infrastructure investment team incorporates sustainability analysis into the investment process and portfolio construction via three main pillars:
As described above, sustainability research may directly affect our valuation of companies to the extent that it affects our assessment of cash flows. For example, companies may need to invest in mitigating the impact of climate change, and such investments need to be reflected in financial forecasts as a part of scenario analysis.
Where we cannot accurately capture sustainability considerations into cash flows, we will adjust the company’s required return or hurdle rate within a range of -0.5%pa to +2.0%pa. Companies exhibiting poor sustainability characteristics have a higher cost of capital and therefore, a lower chance of being included in portfolios (or vice versa). Currently, the sustainability research process considers approximately 25 factors, and these are applied by infrastructure subsector. These factors broadly include:
Environmental factors such as a company’s environmental practices, GHG emissions and energy efficiency initiatives
Social factors such as a company’s approach to community relations, occupational safety and health, and reliability and pricing of services
Governance factors such as the governance structure of the company, management incentives, and our alignment (as a minority shareholder) with the management, board and other major shareholders of the company
Our specialist infrastructure investment team have continually evolved the sustainability process. Scenario analysis has been a critical aspect of our fundamental valuation approach since inception and we have always actively engaged with the companies in which we invest. How we have incorporated sustainability (or earlier, ESG) into our risk pricing has evolved as information sources and company disclosure on these topics became more transparent - we incorporated a governance factor since our inception in 2006, expanding this to ESG factors as Sustainalytics’ first Australian client in 2012 and continuing to evolve the process to the current proprietary scorecard introduced in 2020.
The ability to engage with company management teams is also paramount and, as a result, we do not invest in the securities issued by companies with which our analysts cannot engage.
The inclusion of sustainability as a core part of our investment process significantly contributes to our goal of delivering infrastructure-like returns to investors while mitigating investment risk. Additionally, it enhances investment support to companies with strong sustainability practices. We believe that our approach not only meets the responsibility we have to our clients in achieving their investment goals but also acts in the best interest of future generations.