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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[1] https://www.alphinity.com.au/wp-content/uploads/2025/05/Alphinity-2024-ESG-and-Sustainability-Report.pdf

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Jessica Cairns

Boutique active equities fund manager, Alphinity Investment Management (Alphinity), and CSIRO, Australia’s national science agency, have released a responsible AI (RAI) framework and actionable toolkit to help investors navigate the accelerating AI opportunity.

The Intersection of Responsible AI and ESG: A Framework for Investors Report is a three-part, practical, open-source toolkit that can be tailored and adapted by investors to assess the impact of AI across their investment portfolio. It bridges the gap between emerging RAI considerations and traditional ESG principles, such as climate, modern slavery, and governance.

Step one of the framework determines materiality risk incorporating 27 AI use cases across 9 key sectors. Step two provides governance insight across 10 RAI key indicators, which assess the overall commitment, accountability, and measurement of RAI. Finally, Step three is a deep dive with more than 40 filterable questions to facilitate detailed analysis and engagement with company management on AI implementation and RAI practices.

Alphinity’s Head of ESG and Sustainability, Jessica Cairns, said it was important to proactively investigate and understand risks and opportunities given the rapid uptake of AI.

“The first wave of AI is well underway, dominated by companies with direct revenue exposure alongside ‘picks and shovel’ stocks that provide the tools, platforms, and infrastructure required to drive success in an AI-enabled world,” Ms Cairns said.

“What we are most excited by is the second and third wave, where we see AI creating opportunities for a breadth of traditional sectors, like banking and mining, through improved efficiencies, expanded revenue streams, and boosted productivity.

“Like any tech revolution, however, there will be winners and losers. Rapid advancement also paves the way for significant risks and ethical concerns, which investors must understand, measure, and manage. Our RAI toolkit is designed to address this, providing a framework for investors to analyse the risks and opportunities and the option to deep dive should they spot red flags in their risk and governance analysis.”

The three-part RAI framework follows 12 months of extensive research and engagement with more than 28 global and domestic listed companies across a range of sectors, including Accenture, Commonwealth Bank of Australia, Shell, and Mirvac.

CSIRO Research Director, Professor Liming Zhu, said until it becomes commonplace for both RAI policies and the actual numbers for RAI indicators and metrics to be shared publicly, investors need to know where to look for signs of responsible AI use.

“Combining our RAI research and Alphinity’s investment expertise, the framework is purposefully designed so a range of investors can practically implement it into existing ESG analysis and reporting, picking and choosing the tools that work for them.

“With global AI adoption expected to accelerate significantly between now and 2030, it is imperative we take a considered investment approach to the responsible and safe use of AI.”

While the research found many global companies have extensive AI resourcing, the current wave of AI is levelling the playing field due to its general capabilities and ease of access.

“This provides strong opportunities for Australian companies and investors to embed best practice and robust risk mitigation from the early stages,” Professor Zhu said.

“Our research showed RAI governance is best embedded within existing systems and processes and a strong track record of ESG performance is an indicator of confidence for investors.”

Alphinity will implement the RAI framework, tools, and templates into its ESG analysis processes and hopes this framework and toolkit will become an industry-wide standard.

“We are already leveraging the framework in our investment strategy,” Ms Cairns said. “We will continue to engage with our investee companies and advocate for the uptake of publicly

disclosed RAI practices, an important governance measure as AI adoption booms.

“Our hope is that all investors, from super funds to boutique fund managers, will adopt responsible AI frameworks into ESG considerations and responsible investment criteria.”

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Jessica Cairns

Boutique active equities fund manager, Alphinity Investment Management (Alphinity), has unveiled a partnership with Australia’s national science agency, CSIRO, to develop a framework to help the investment community assess responsible artificial intelligence (AI) practices and integrate into ESG considerations.

Informed by interviews with businesses using or planning to use AI, the year-long research program will result in a report identifying current best practice and provide a framework to assess, manage and report on responsible AI risks.

Responsible AI is the practice of developing and using AI systems in a way that provides benefits to individuals, groups, and wider society, while minimising the risk of negative consequences.

Alphinity’s Head of ESG and Sustainability, Jessica Cairns, said AI technology was presenting investors with a new set of ever evolving challenges and greater insight was needed to guide investment decisions.

“AI will present significant opportunities to improve company performance, but we foresee potential risks in areas of governance, social licence, and operations, and investors will increasingly need to identify these.

“We’re inviting companies that are more advanced in their adoption of AI, or are actively exploring AI application, to participate and share information with us on their experience and thinking on the impact and responsible application of artificial intelligence across every facet of their business,” Ms Cairns said.

“Our work with CSIRO will contribute to increased awareness and knowledge of responsible AI considerations within the investment community. We hope the case studies and other data will also assist companies at the start of their AI journey to implement best-practice considerations,” Ms Cairns said.

“From our perspective, it will create a foundation for the longer-term development of frameworks for analysis and robust modelling of responsible AI within our broader set of ESG performance and risk analysis.”

CSIRO Research Director Liming Zhu, who leads the Responsible AI Initiative, said: “This unique partnership will combine the investment community’s deep expertise with CSIRO’s cutting-edge scientific understanding of AI risks and opportunities. This collaboration aims to empower Australian businesses to attract global investments.”

“Australia can lead the world in the responsible development and use of artificial intelligence, but to practically achieve that we must bring diverse skill sets together and develop measurements and tools to support implementation.

“This project will give us insights into the AI risks and opportunities companies are grappling with and provide guidance around best practices that will help both investors and companies.”

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Jeff Thomson

Leading Australian and global equities boutique fund manager Alphinity Investment Management has launched a global sustainable strategy that aims to invest in quality global companies which are supporting the transition to a more sustainable future and are also identified as undervalued and within an earnings upgrade cycle.

The new Alphinity Global Sustainable Equity Fund (Fund) retains the concentrated nature and investment approach of the well-established Alphinity Global Equity Fund, which has returned 14.4% p.a.^[1] after fees since inception in December 2015 (as at 30 June 2021), but also applies the same rigorous sustainable and ESG methodology currently used by the Alphinity Australian Sustainable Share Fund (launched in 2010).

The new Fund seeks to invest in a diversified portfolio of leading sustainable companies that offer attractive financial returns, have strong ESG practices, and are aligned with one or more of the 17 UN Sustainable Development Goals (SDGs)^[2]. These SDGs cover key themes like equality, promoting healthier lives and well being, building resilient infrastructure and combating climate change.

A Sustainable Compliance Committee, including two recognised independent ESG experts, supported by Jessica Cairns, Alphinity’s ESG and Sustainability Manager, provide specialist insights and also ensure the Fund remains ‘true-to-label’ and aligned with the fund’s Charter.

Portfolio Manager, Jeff Thomson said he and the Alphinity Global team focus on companies that ‘do good’ and ‘do it well’. They also seek to avoid companies that are involved in activities that are incompatible with the objectives of the Fund, may be harmful to society and are inconsistent with the UN SDGs.

“We have a zero revenue tolerance for producers of tobacco and controversial weapons. We also don’t support companies generating more than 5% of their revenues from the production of fossil fuels, controversial fuels such as uranium, gold mining where gold is the primary purpose of the mine, factory farming, live exports, predatory lending, alcohol and gambling, and old growth forestry logging, for example.”

Mr Thomson said other no-go companies were those that have demonstrated poor management of ESG issues such as breaching human rights principles, unnecessary pollution or avoiding a fair share of tax payments.

“When we come across a grey area related to ESG issues or alignment with the SDGs the Sustainable Compliance Committee assesses the matter and determines whether Alphinity can support the company’s activities.  The Committee includes Elaine Prior, an award-winning ESG pioneer and former managing director at Citi Research in Sydney, and lawyer Melissa Stewart, a Canadian modern slavery and human rights expert.

“Only those companies that meet these stringent sustainability conditions are then assessed against Alphinity’s investment philosophy and process to ensure they are quality undervalued companies in or entering an earnings upgrade cycle and are therefore candidates for our portfolio,” Mr Thomson said.

Alphinity Investment Management is supported by Challenger Limited subsidiary Fidante Partners, which forms long term alliances with talented investment teams to support and grow specialist investment management businesses.

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[1] Source: Fidante Partners: returns are calculated after fees have been deducted and assume distributions have been reinvested. No allowance is made for tax when calculating these figures. Past performance is not a reliable indicator of future performance.
[2] ‘Strong ESG practices’ means companies that are not rated B or C by our external ESG research provider, MSCI, subject to review by the Sustainable Compliance Committee.

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Stephane Andre

Alphinity Investment Management’s Sustainable Share Fund has been added to the FirstChoice platform.

The Alphinity Sustainable Share Fund is rated Highly Recommended by Lonsec and Recommended by Zenith. It invests in between 35 and 55 companies listed on the ASX which support the United Nations’ Sustainable Development Goals, have good environmental, social and governance practices, and create positive social and economic outcomes.

The Fund is also a top performer, returning 9.1% p.a.^[1] in the ten years since its inception, 1.8% above its benchmark, the S&P/ASX300 Accumulation Index.

Alphinity Principal and Portfolio Manager Stephane Andre said Alphinity was delighted to bring an Australian sustainable fund to FirstChoice.

“Over the last decade we’ve provided investors with access to a diversified portfolio of Australian stocks listed on the ASX that have strong ESG characteristics and, where possible, contribute towards the advancement of the UN Sustainable Development Goals. By bringing the Alphinity Sustainable Share Fund to the Colonial First State FirstChoice platform we are able to reaffirm that commitment and broaden the reach of the Fund to even more investors,” Mr Andre said.

The Fund is co-managed by Stephane Andre and Bruce Smith, who are also Principals and founded Alphinity in 2010 along with Johan Carlberg and Andrew Martin.  Andre and Smith are supported by recently appointed Alphinity ESG and Sustainability Manager, Jessica Cairns along with rigorous overview by the Alphinity Sustainable Share Fund Compliance Committee, which includes independent sustainability experts Elaine Prior and Melissa Stewart.

Alphinity Investment Management is supported by Challenger Limited subsidiary Fidante Partners, which forms long term alliances with talented investment teams to support and grow specialist investment management businesses.

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[1] Source: Fidante Partners: returns are calculated after fees have been deducted and assume distributions have been reinvested. No allowance is made for tax when calculating these figures. Past performance is not a reliable indicator of future performance.

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Jessica Cairns

Leading Australian and global equities boutique fund manager, Alphinity Investment Management, has strengthened its ESG investing and research capabilities with a set of appointments, as it celebrates its 10 year anniversary.

Alphinity has appointed Jessica Cairns to the newly-created role of ESG & Sustainability Manager, a move which supports Alphinity’s efforts to more deeply integrate ESG-related matters across its domestic and global equities funds, including the high-performing Alphinity Sustainable Share Fund.

Jessica brings more than a decade of experience in supporting the sustainability elements of strategic projects. Her most recent role was as Senior Sustainability Advisor at Transurban, where she was responsible for the company’s response to the Taskforce on Climate-related Financial Disclosure (TCFD) recommendations and supported the delivery of sustainability initiatives to meet Transurban’s broader sustainability strategy. Prior to this she spent four years as a case manager at the Infrastructure Sustainability Council of Australia, where she was responsible for helping infrastructure teams across the nation achieve better infrastructure sustainability. Jessica holds a Bachelor of Environmental Science and Management (Honours) from the University of Newcastle and a Diploma in Project Management from the University of New England.

Her appointment follows that of Jacob Barnes and Andrey Mironenko, both of whom joined Alphinity as Research Analysts earlier this year. Jacob joined from First State Super, where he was a senior investment analyst in its direct equities team. Prior to this he worked at private wealth manager Bailey Roberts Group as an equities analyst and portfolio manager. He is now focusing on consumer stocks as a member of the domestic equities team.

Andrey joined Alphinity after seven years with McKinsey in its Sydney, San Francisco, Moscow and Houston offices. Andrey spent four years in the firm’s strategy and corporate finance practice and worked extensively at McKinsey Global Institute where he contributed to a wide range of research, including on climate change, the impact of changing technology and the future of work. At Alphinity, Andrey focuses on information technology and chemical companies, as well as the Alphinity Sustainable Share Fund.

Alphinity Principal and Portfolio Manager Stephane Andre said all three were adding considerable value to Alphinity, which is also celebrating its 10th anniversary.

“Jessica is already playing an important role in assisting the Sustainable Share Fund Compliance Committee in refining the investment universe for the Fund which considers companies’ contribution towards achieving the UN’s Sustainable Development Goals (SDG). Along with the analysts, she will also help to drive company and market engagements, and ensure Alphinity remains a leading thinker in ESG and SDG matters.”

“Jacob and Andrey’s work is also providing impact and has helped to deepen Alphinity’s fundamental research analytical capabilities, which underpin our investment philosophy,” Mr Andre said.

Alphinity has delivered consistently strong returns since it was established in 2010 by identifying opportunities across market cycles and investing in quality, undervalued companies with underestimated forward earnings expectations

Its Australian equity funds have all met their objectives, outperforming their respective benchmarks after fees over the market cycle, since Alphinity assumed management of them in September 2010.

In the ten years since inception the Alphinity Australian Share Fund delivered 8.1% p.a. and the Alphinity Sustainable Share Fund 9.1% p.a. (vs 7.3% p.a. for the S&P/ASX 300 Accumulation Index) while the Alphinity Concentrated Australian Share Fund returned 9.1% p.a. (vs 7.3% for the S&P/ASX 200 Accumulation Index). Each of the Funds has experienced a strong Information Ratio, the measure of excess return delivered for the risk taken, of around 1 since inception.

Alphinity Principal and CEO Johan Carlberg said: “We’re excited about the future. Five years ago we added the global equity team which has demonstrated the strength of our investment process in international equity markets. With the recent additions to the team we are building on our traditional research strength, and evolving along with companies which are increasingly recognising that they need to succeed while demonstrating strong ESG and Sustainability credentials.”

Alphinity Investment Management is owned by its staff in conjunction with Fidante Partners, the funds management business of Challenger Limited.

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