“ATLAS believes that over the long term, all infrastructure assets operate under an implicit Environmental, Social and Governance (ESG) ‘contract’ which will influence long term cashflows in the same way as any formal contracts they may have. We therefore incorporate ESG factors and risks directly into our forecast cashflows and hence directly into our decision making.” – David McGregor, Partner.
ATLAS – ESG IN THE INVESTMENT PROCESS
ESG and Climate Change
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.
Our portfolio construction process incorporates and reflects ESG analysis and risk in the following ways:
- Environment – we incorporate explicit assumptions about climate change policy 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.
Climate Change – Detailed Scenario Analysis
ATLAS has developed a detailed proprietary methodology which explicitly models the cash flow impacts of three climate change policy scenarios and associated economic transitions. The scenarios modelled are Fast Transition, Base Case and Delayed Action. 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.
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.