Jessica Cairns
As the responsible investment landscape matures, it is no longer enough to simply “tick the box” on ESG and sustainability. The issues shaping portfolio risk and return are becoming more complex, interconnected and dynamic. For investors, this means sharpening the lens on what matters most and looking more closely at how well portfolios are positioned for the structural forces shaping tomorrow’s markets.
We recently launched our fourth annual ESG and Sustainability Report[1] detailing our insights from nearly 200 company engagements, on-the-ground research trips, and desktop reviews completed throughout 2024. In this we have identified eight thematics and 30 key topics emerging as the defining issues for investors. These thematics go to the heart of how companies create value, manage risk and earn trust in an increasingly transparent and interconnected world. For investors, these themes, a few of which are detailed below, offer both a framework for making investment decisions, managing risk and a compass for evaluating long-term portfolio resilience and emerging issues.
Cybersecurity and AI: On the rise
A clear trend is the increased engagement with companies to improve transparency around cyber preparedness and AI governance. Across our 200 company engagements in 2024, 20% discussed digital technology and data. In 2022, this was only 7% of engagements – reflecting the increased materiality of this issue from a risk perspective for all organisations.
Today, cybercrime is one of the most material topics across the ESG spectrum. It is an issue which is relevant to almost all companies and the risk management approach is difficult to assess.
Cyber incidents are increasing in both frequency and severity, with real implications for corporate reputation and shareholder value. The CrowdStrike outage in July 2024, which caused 8.5 million global computer systems to crash, was not linked to a cyber crime event however, it did shine a light on the world’s growing reliance on cloud connected and digital systems. It highlights the importance of assessing the risk of events such as scams, ransomware attacks, bad actor breaches and theft, and general data breaches from technology or process failures.
The increasing number of generative AI use cases throughout everyday business is also an area with growing ESG relevance. While the integration of AI presents productivity benefits, it raises new questions about data ethics, energy consumption, bias, and workforce disruption. Last year Alphinity, together with CSIRO, released an open-source responsible AI framework and toolkit to help investors navigate the accelerating AI opportunity. AI is predicted to transform entire industries and offer substantial efficiency gains, and while not typically associated with an ESG lens, we see this as a way for investors to assess the impact of AI across their investment.
The investment implication is clear: firms that are proactive on these fronts are better positioned to avoid material downside risk and to capture upside opportunities in digital transformation.
Social licence: Instrumental to company success
A company’s social licence to operate is a measure of the level of trust between an organisation and its key stakeholders. If a company loses the trust of its stakeholders, its social licence to operate is also impacted and often results in negative consequences for its operating conditions. This impact can be as a result of regulatory intervention, community protests and disruption, customer-related controversies, unfavourable news and media, corruption and bribery, and shareholder activism.
The tricky part is measuring it. In 2024, the percentage of engagements related to social licence increased to 24%, up from 5% in 2022. Much of this focus was related to how a company can measure its social licence and how investors can get better transparency on this. For example in 2023, we established two engagement objectives for Rio Tinto; firstly, to update its remuneration structure to better incentivise management to mitigate ESG risks such as related to social licence; Secondly, to improve the measurement of social licence including insights from key stakeholders like traditional owners.
Climate and biodiversity: A wider lens
Climate change has long been a focus for Alphinity, and our latest report reflects to the expanding focus to also include nature and biodiversity loss as material financial risks.
Climate change and the disorderly transition pose a considerable systemic risk to the global economy and remain a central concern for investors – but the lens is widening. Biodiversity loss is continuing to increase in materiality across our holdings with implications for agriculture, resource security and supply chains. Australia is particularly exposed given our economy’s reliance on nature-dependent industries in agriculture and industry, as well as the nature impacts imposed by mining, energy and infrastructure.
Woolworths and Coles for instance received their first shareholder proposals related to nature-related impacts in 2024. South32 also experienced a biodiversity-related controversy which impacted it’s share price.
Initiatives like the Taskforce on Nature-related Financial Disclosures (TNFD) are helping businesses and investors begin to quantify exposure, and the Federal Government has also made changes to environmental regulations to strengthen penalties and regulatory oversight. In 2024, Alphinity became an early adopter of the TNFD. We are committed to begin disclosing in line with the TNFD Recommendations within our next ESG and Sustainability Report, covering the 2025 calendar year.
Human rights and modern slavery: From policy to practice
We have a responsibility to ensure, to the greatest extent possible, that human rights and modern slavery violations do not occur in the companies in which we invest, including in their supply chains. This is both an ethical responsibility as well as a material investment imperative.
Supply chains remain the highest priority for human rights and modern slavery risks based on exposure to high-risk commodities and regions. Across our 2024 holdings, Supply chain risks hold the highest exposure with 20% of companies having a medium or high risk. According to our assessment, operational exposure to modern slavery risks is largely negligible, however, this can still be very material for certain companies such as those engaged in agriculture. 17% were assessed as low risk due to direct operations in high-risk countries such as China, India and Malaysia.
Regulatory momentum around human rights due diligence is accelerating, setting a higher bar for companies and investors alike.
These thematics, and the others detailed in our latest report, are not academic. They group the 30 most material ESG issues for our 2024 holdings and are established using a bottom-up materiality assessment of more than 40 ESG topics. The ESG landscape is not static and there can be no doubt that over the past year, in a changing political environment, ESG has become a polarising issue.
Regardless of the political environment, we know that our responsible investing efforts will help us to achieve our ultimate goal of delivering attractive long-term risk adjusted returns for our clients.
By Jessica Cairns, Head of ESG and Sustainability
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