ATLAS believes that over the long term, all Infrastructure assets operate under an implicit Environment, Social and Governance ‘contract’ which will influence long term cashflows in the same way as any formal contracts they may have. We therefore incorporated Environmental, Social and Governance factors and risks directly into our forecast cashflows and hence directly into our decision making.
The portfolio construction incorporates and reflects environmental, social and governance analysis and risk in the following ways:
- Environment – we incorporate explicit assumptions about climate change and the regulatory and economic changes that will be required over the next 50 years. This forms part of our long term macro assumptions and therefore feeds into the cashflow forecasts for each asset in our portfolio. Risk is captured through specific scenario modelling as well as calculation of the beta to changes in carbon costs.
- Social – our long term forecasts contain explicit assumptions about social contract and the ability of companies to sustain excess returns. Where there is risk to social contract through management actions or public policy, we capture this through specific stress testing for the company which is then reflected by a higher risk of loss in the portfolio.
- Governance – We incorporate governance risk in our forecasts through direct assumptions about capital management policy and reinvestment as well as including specific stress scenarios for companies with poor reinvestment control and capital discipline.
The result of this process is that we do not need to introduce separate ‘qualitative overlays’ in portfolio construction which can then create conflicting signals with the ‘quantitative’ outputs. The ESG exposures and risk for each asset are reflected in either basecase cashflows or scenario / stress case outputs or both and are therefore directly and automatically part of each portfolio decision.
The Firm’s climate related scenarios and our assumptions with respect to the social contract and corporate governance of the companies we cover are subject to regular scrutiny by specifically tasked experts on ATLAS’s Investment Governance Board and, in the case of our climate scenarios, on our Macro Advisory Board.
We record ESG risks and key issues for each company as part of a detailed research process. A summary of the key ESG issues is included and referenced in all proxy voting recommendations that are considered at the ATLAS Investment Committee.
Finance and climate change
ATLAS is focused solely on long-term infrastructure investing. We are driven by an underlying interest in the asset class and a curiosity which motivates us continually to develop our understanding of infrastructure assets and the regulatory, contractual and economic frameworks in which they operate. Our role, quite simply, is to utilise the knowledge derived from our experience and our research, to build portfolios of high quality infrastructure assets to meet our clients' investment objectives.
The ATLAS investment universe comprises 150 high quality infrastructure stocks with a combined market capitalisation of approximately US$2.0tn. The investment universe includes companies from a range of infrastructure sectors including toll roads, airports, sea ports, communications infrastructure, electric, gas & water utilities, and transmission pipelines.
Infrastructure assets are, by their nature, long lived and relatively inflexible. Therefore, in purchasing long dated infrastructure assets, investors inherently take on exposure to changes in government policies and other social and climate related factors.
ATLAS has developed a proprietary methodology which explicitly models the cash flow impacts of climate change policies and associated economic transitions. Consideration of these factors is an integral part of our assessment of all investments for all portfolios, rather than an approach for a particular strategy or as an addendum to our investment process.
Hermes Investment Management
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