The inclusion of sustainability and ESG is a core part of the infrastructure investment process for ClearBridge in Australia. We believe that enhancing investment support to companies with strong sustainability practices 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.
Sustainability is often referred to as environmental, social and governance (ESG) factors. However, for our specialist infrastructure investment team, it also includes other long-term factors, such as disruption. Our investment team believes that sustainability factors are an important aspect of company performance and since inception has incorporated these factors as part of our standard investment appraisal process. We do not defer sustainability analysis to a dedicated ESG analyst; rather, it is a responsibility of all investment team members.
As global listed infrastructure specialists, our investment philosophy includes the delivery of infrastructure-like returns to investors while mitigating investment risk wherever possible. Our process combines input from our in-depth sector knowledge, our communications with company management and non-executive directors as well as our network of industry experts, and various third-party sources, such as ESG risk report provider Sustainalytics, into a proprietary sustainability scorecard. The Sustainability Committee is responsible for oversight of the sustainability process within the investment team and ensuring that the process remains effective.
To construct our investment universe or opportunity set, we initially screen the global universe of listed equity securities for infrastructure companies. This 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 and regions for:
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.
We utilise the following three pillar process:
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% p.a. to +2.0% p.a. 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:
Our specialist infrastructure investment team has continually evolved the sustainability process. In particular, the incorporation of sustainability considerations into our risk pricing has developed as information sources and company disclosures have become more transparent. - We have incorporated a governance factor since our inception in 2006, expanding this to broader ESG factors by engaging Sustainalytics’ (as their first Australian client) in 2012. We continue to evolve our approach to ESG through the current proprietary scorecard introduced in 2020.
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.