NEWS
26 Jun 2025 - Beginning of the End or End of the Beginning?
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Beginning of the End or End of the Beginning? Alphinity Investment Management June 2025 |
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It's hard to imagine a world where Apple and Google (Alphabet) aren't dominant. These two tech giants have been at the centre of our digital lives for nearly two decades - Apple through its control of the smartphone ecosystem, and Google through its command of online search. But history reminds us that no company, no matter how dominant, is completely immune to disruption. The rise of artificial intelligence (AI) could pose the greatest threat these businesses have ever faced and opens a plausible path for this dominance to be challenged.  Google's Grip on Search Is Under Threat Google has long enjoyed an unshakable position in internet search, capturing more than 90% of global market share. But this near monopoly is no longer as impregnable as it once was. The emergence of large language models (LLMs) like OpenAI's ChatGPT and newer players like Perplexity introduces a very different way to access information - one that doesn't rely on the traditional "10 blue links" model of search. These AI systems offer more direct, conversational answers. They aggregate information across sources and present it in a more human and contextual way. For many types of queries, particularly research, how-tos, and summaries, they can be faster and more useful than Google. And these new LLM's are beginning to take their conversational interface into commercial search, the very core of Google's business. If users increasingly turn to LLMs for commercial queries, ad revenue will begin to migrate with this shift in engagement. This is important as Search advertising revenue is circa 57% of Google total revenue, and given the high margin attached to it, this would translate into > 80% of Google profitability. While Youtube, Cloud and Waymo are quality and growing businesses, the key to the future value of Google remains inextricably tied to Search and this is currently under threat. Google is investing heavily in AI through its Gemini platform, but the challenge it faces is not just technological - it's structural. Shifting its business to meet the new paradigm of Ai summaries could cannibalise its existing ad revenues. In short, Google has to disrupt itself while fending off nimbler rivals that don't carry the same baggage - the ultimate "innovators dilemma". To date these moves have been tentative leaving the door ajar for competitive displacement.  Apple's Ecosystem Fortress Is Showing Cracks Apple's dominance has long rested on two powerful pillars: its tightly integrated hardware led by the iPhone (which still accounts for more than 50% of revenue), and its faster growing, high-margin services business. Together, they form one of the most valuable consumer ecosystems ever built. But both sides of this ecosystem are now facing meaningful threats from technological disruption, compounded by regulatory pressure. On the technology front, Apple looks to be slipping behind in the race to define the next user interface. As AI becomes central to how we interact with devices - through voice agents and intelligent assistants - Apple's core interface in Siri is lagging badly. While rivals like Open Ai, Meta and Perplexity are rapidly advancing conversational AI, Apple's Siri updates are continually delayed, with the next major upgrade now not reportedly arriving until 2027. If new device platforms emerge that are built around AI-first interaction, Apple's dominance in hardware could be challenged. We are already seeing a potential alternate device state emerge in glasses, with Meta in development with Essilor Luxottica and Google announcing a deal with Warby Parker. The acquisition by Open Ai of Apple alumni Jony Ive's Ai hardware startup "io" is another strand in the intensifying Ai device competitive landscape. At the same time, Apple's services business is under legal scrutiny. Regulators in the U.S. are seeking to block its multibillion-dollar search deal with Google; a move that could curtail a major source of annual revenue and earnings. Court documents have put this payment at around $25bnpa or 6% of revenue. Meanwhile, pressure is mounting globally to force Apple to open its App Store to alternative payment systems and third-party downloads, weakening its ability to charge developers a 30% commission (often called the "Apple tax"). Coupled together we have approx. $55bn of high margin Apple Services revenue under threat from a tightening regulatory landscape. Together, these risks suggest that Apple's once-unshakeable ecosystem is increasingly vulnerable. Just as Apple rose to power during the mobile revolution, the shift toward AI at a time of greater regulatory interventions could open the door for new competitors to disrupt both its hardware and services businesses. Lessons from History While it is difficult to imagine a world where Google and Apple are not dominant, the technology sector is littered with examples of once-dominant firms that failed to adapt to technology platform shifts:
The birth of the internet gave rise to today's giants. The birth of AI may, in turn, create the conditions for new leaders to emerge - or for today's leaders to stumble.  What This Means for Investors As an investor it's tempting to stick with the familiar and extrapolate what we currently see. Apple and Google have delivered years of strong returns and are still generating exorbitant levels of free cash. But dominance in tech is rarely permanent. Disruption often starts with tiny cracks and by the time it is more obvious, the market has already repriced the winners and losers. Now this doesn't mean it is definitely "over" for these two giants. They have faced substantial risks before and managed to morph their business to adapt to the prevailing conditions. And there are competing, more positive narratives that the breadth of Google services and depth of Ai skills can see it emerge as an Ai winner while Apple can position as the "on-ramp" for consumer Ai engagement. But for the first time in a while the wind seems to be more in these companies' faces, and while still uncertain, a path to a substantial weakening of the Apple and Google businesses is beginning to open-up. As such a more cautious view on these companies is warranted, and it means staying highly attuned to shifts in user behaviour, the adoption of AI tools, and focusing on where the innovation is really happening. The companies that succeed in the AI era may look very different from those that have succeeded in the internet era and the potential weakening of Apple and Google could create the space for an Ai native trillion-dollar company to emerge. |
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Funds operated by this manager: Alphinity Australian Share Fund , Alphinity Concentrated Australian Share Fund , Alphinity Sustainable Share Fund , Alphinity Global Equity Fund , Alphinity Global Sustainable Equity Fund This material has been prepared by Alphinity Investment Management ABN 12 140 833 709 AFSL 356 895 (Alphinity). It is general information only and is not intended to provide you with financial advice or take into account your objectives, financial situation or needs. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. Any projections are based on assumptions which we believe are reasonable but are subject to change and should not be relied upon. Past performance is not a reliable indicator of future performance. Neither any particular rate of return nor capital invested are guaranteed. |
25 Jun 2025 - The return you see, the risk you don't
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The return you see, the risk you don't Canopy Investors June 2025 It's not whether you're right or wrong, but how much money you make when you're right and how much you lose when you're wrong.George Soros (quoted by Stan Druckenmiller), The New Market Wizards: Conversations with America's Top Traders, 1994
Investing is the pursuit of a return in the face of an uncertain future. While every opportunity involves risk, the concept itself is often not well understood. What is, and isn't, risk?Historically, risk has often been proxied by share price volatility, likely because volatility is easily measured and readily observable. However, volatility is a statistical concept, measured on a backward-looking basis and often over a short time frame, whereas risk is fundamental and forward-looking. Volatile stocks are not necessarily risky if they can be expected to significantly appreciate in value over time. As Morgan Housel has previously noted, "Volatility is the price of admission. The prize inside [is] superior long-term returns. You have to pay the price to get the returns." Risk is also sometimes conflated with uncertainty. While related, they are not the same. All investments we make involve some degree of uncertainty--future product launches, management execution, competitive dynamics. But uncertainty is not risky if it is adequately reflected in the share price. Even less helpful is the view that risk equals deviation from a benchmark. While tracking error may increase an investment manager's career risk, it has little to do with investment risk. Chasing momentum stocks can seem smart as prices rise -- particularly when benchmarks are similarly skewed -- but this can be dangerous. Avoiding the easy money rollercoaster may increase tracking error while actually lowering risk. At Canopy, we define risk as the likelihood of permanent capital loss. That risk is shaped by two factors: the price we pay for an investment, and the future performance of the underlying business. Alternative historiesA key implication of the above is that while investment returns are readily observable, the risk taken to achieve them is not. In Fooled by Randomness (2001), Taleb introduces the concept of 'alternative histories' - the idea that what actually happened (in this context, a realised return) is only one sample path among many that could have occurred. He argues that our tendency to focus on realised success leads us to underestimate luck and overestimate skill, and by extension, to ignore risk. Figure 1 illustrates the path of alternative histories to a realised return outcome.
This dynamic likely explains much of the well-documented lack of persistence in investment manager returns: in strongly rising markets, the highest returns are often achieved by those who take the most risk, which may unravel when conditions reverse. Gottesman and Morey (2021) support this, showing that funds with high upside capture ratios (outperformance during rising markets) also tend to have high downside capture ratios (underperformance in down-markets). Howard Marks summarises the concept well in his 2015 memo 'Risk Revisited Again': "The celebrated investor is one whose actions yielded good results. Was she lucky or good? How much risk did she take? Since it's risk-adjusted return that counts, can we tell whether her return was more than commensurate with the risks borne or less than commensurate? I'm confident that the answers lie in skilled, subjective judgments, not highly precise but largely irrelevant ratios of return to volatility."
Our approachWith that context, our risk management process is designed to minimise the risk of permanent capital loss, while maintaining our exposure to listed companies:
While we have access to factor and volatility-based risk models, as noted above, they tend to measure backward-looking price movements rather than the probability of permanent capital impairment, and they are consequently less relevant to our risk framework. |
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Funds operated by this manager: |
24 Jun 2025 - Why invest in infrastructure
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Why invest in infrastructure Magellan Asset Management May 2025 |
What is infrastructure?Investing in infrastructure is about investing in the companies that provide essential services to society and that generate predictable long-term earnings. These assets include transportation, energy and utilities, communications and social infrastructure businesses. Why invest in Global Listed Infrastructure?Investing in global listed infrastructure offers unique advantages for investors. With over 350 infrastructure and utility companies available on global stock markets, these investments have the potential to provide reliable cash generation, inflation protection, and defensiveness in declining markets.
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Funds operated by this manager: Magellan Global Fund (Open Class Units) ASX:MGOC , Magellan Infrastructure Fund , Magellan Global Opportunities Fund No.2 (Class A) , Magellan Infrastructure Fund (Unhedged) , Magellan Global Fund (Hedged) , Magellan Core Infrastructure Fund , Magellan Global Opportunities Fund
Important Information: Copyright 2025 All rights reserved. Units in the funds referred to in this podcast are issued by Magellan Asset Management Limited ABN 31 120 593 946, AFS Licence No. 304 301 ('Magellan'). This material has been delivered to you by Magellan and has been prepared for general information purposes only and must not be construed as investment advice or as an investment recommendation. This material does not take into account your investment objectives, financial situation or particular needs. This material does not constitute an offer or inducement to engage in an investment activity nor does it form part of any offer documentation, offer or invitation to purchase, sell or subscribe for interests in any type of investment product or service. You should obtain and consider the relevant Product Disclosure Statement ('PDS') and Target Market Determination ('TMD') and consider obtaining professional investment advice tailored to your specific circumstances before making a decision about whether to acquire, or continue to hold, the relevant financial product. A copy of the relevant PDS and TMD relating to a Magellan financial product may be obtained by calling +61 2 9235 4888 or by visiting www.magellangroup.com.au. The opinions expressed in this material are as of the date of publication and are subject to change. The information and opinions contained in this material are not guaranteed as to accuracy or completeness. Past performance is not necessarily indicative of future results and no person guarantees the future performance of any financial product or service, the amount or timing of any return from it, that asset allocations will be met, that it will be able to implement its investment strategy or that its investment objectives will be achieved. This material may contain 'forward looking' statements and no guarantee is made that any forecasts or predictions made will materialise. No representation or warranty is made with respect to the accuracy or completeness of any of the information contained in this material. Magellan will not be responsible or liable for any losses arising from your use or reliance upon any part of the information contained in this material. This material and the information contained within it may not be reproduced, or disclosed, in whole or in part, without the prior written consent of Magellan. Further important information regarding this podcast can be found on the Insights page on our website, www.magellangroup.com.au. |
20 Jun 2025 - China's big charge: EVs, oil and the renminbi
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China's big charge: EVs, oil and the renminb abrdn June 2025 Since 1945, the exchange of dollars and oil has been a bedrock of the world's financial system. Oil runs north through the Suez Canal and south via the Straits of Hormuz. Greenbacks flow in the opposite direction. Oil is the lifeblood of economies, and they can't operate without dollars. But the world is changing. China has achieved global leadership in manufacturing, but the renminbi (RNB) has failed to come close to the dollar by any measure. Yet, where its currency ambitions might have failed, China seems poised to take the lead in clean energy. In 2025, leading global battery maker Contemporary Amperex Technology (CATL) launched a car battery that charges in 10 minutes. This is far faster than traditional electric vehicle (EV) batteries. The technology that underpins this leap forward continues to spread, with energy storage systems increasingly supporting grids powered by renewable energy. In the next century, the global energy exchange could switch, with sodium and lithium ions flowing one way, and the RMB flowing the other. Batteries powering the futureChina dominates battery and energy storage systems, enabling its grid to manage a significant amount of renewable energy input, around 31% of total production. Next year, solar is forecast to overtake coal as China's leading energy source. In 2024, Asia commissioned 24.7-gigawatt (GW) capacity of BESS (battery energy storage systems), with China accounting for 95% of that storage. This compares North America's 14.2GW and Europe's 2.4GW (including the UK) [1]. Then there's China's vast fleet of EVs. China bought 11 million of the 17 million EVs sold last year, dwarfing sales in every other market. Chinese cars offer high quality at low cost, attracting consumers worldwide. Chinese EVs can be up to three times cheaper than US or European models. China has overtaken Japan and Germany as the world's leading car exporter (see Chart 1). Chinese EVs can be seen on the roads all over Asia, Latin America and increasingly in Europe.
Chart 1: China has become the world's largest car exporter
Stock to watch - CATLContemporary Amperex Technology Co (CATL) is the leading light of Chinese EVs and battery technology supremacy. Holding a commanding 38% market share across all battery types, the company innovates at a startling pace. CATL spearheads industry technological advancements across various dimensions. Before 2016, lithium iron phosphate (LFP) batteries dominated China's passenger EV market due to their lower barriers to entry and costs compared to nickel cobalt manganese (NCM) batteries. Most top battery producers focused on LFP technology, but CATL was quick to see the potential in high energy-density batteries. It invested significantly in NCM technology, while industry peers prioritised cost reduction. This bold approach has cemented CATL's position as the global leader in the sector. Earlier this year, China's BYD Auto unveiled the super-fast charging 10c battery, which takes just 10 minutes to charge for a 400-kilometer (km) range. In response, CATL unveiled the Gen 2 Shenxing battery, offering the same charge but within extended 520km range. Last year, we visited one of CATL's new Chinese factories. The engineering prowess was impressive with much of the process automated, and batteries seamlessly floating along the production line. CATL recently listed on the Hong Kong Exchange, with the shares rising by 16% on the first day and giving the group a market capitalisation of USD166bn. Despite playing a pivotal role in the global transformation in energy and transportation, CATL still offers value and an attractive yield. The stock trades at 15x price/earnings and is expected to grow by 20% this year. With strong fundamentals, we think it can compound at 15% annually, while paying out 50% of its profits and offering a 2.8% yield. The future of EV batteries has arrived [2]. |
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Funds operated by this manager: abrdn Sustainable Asian Opportunities Fund , abrdn Emerging Opportunities Fund , abrdn Sustainable International Equities Fund , abrdn International Equity Fund , abrdn Multi-Asset Real Return Fund , abrdn Multi-Asset Income Fund , abrdn Global Corporate Bond Fund (Class A) |
19 Jun 2025 - The positive feedback loop we're expecting to see in emerging market economies?
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The positive feedback loop we're expecting to see in emerging market economies Pendal June 2025 |
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Uncertainty remains high in financial markets among participants and policy makers. This uncertainty is driven by global trade policy and how it will affect growth, inflation and ultimately interest rate decisions (and market expectations of those decisions). The International Monetary Fund now believes today's tariff-driven environment is more challenging than the COVID era. "[Early in the pandemic] central banks everywhere were moving in the same direction in the sense of easing monetary policy very quickly," IMF deputy Gita Gopinath said last week. "But this time around the shock has differential effects." Looking at previous cycles in emerging markets - especially considering the impact of a weaker US dollar and incoming capital flows - Pendal's EM team believes emerging markets are mostly in an extended period of cutting policy interest rates. We believe this will be supportive of emerging economies and emerging equity markets. Emerging markets cutting ratesLast year we saw rate cuts in many advanced economies as the 2022 inflation surge eased. But this year global central banks have been more cautious, either in their statements or the speed or extent of rate cuts. Why? Because volatility in trade policy creates significant uncertainty about growth and inflation.
In the emerging world, however, most central banks have continued cutting rates. The 19 independent central banks in the MSCI Emerging Market Index members (Greece uses the Euro and the four Arabian Gulf nations have USD pegs) have delivered 24 policy rate cuts and only four hikes in the first five months of 2025. (Of those hikes, three were in Brazil where economic growth remains very strong, and the other was in Turkey after three big cuts.) A clear patternThere is a clear pattern here. GDP growth forecasts for 2025 and 2026 have been revised lower in emerging Asia (and sharply lower in developed markets) but have held largely steady in EMEA and Latin America. Many of the central banks on hold are in emerging Asia - China, Taiwan, Malaysia - despite this region's more-challenging growth outlook. We believe this is because those countries - with their export-based economic development models and big current account surpluses - have been less sensitive to the strong US dollar in recent years, and have been able to keep interest rates lower than the current account deficit countries. For example, Taiwan had a 2024 current account surplus of 14.1% of GDP. Its central bank has been on hold at 2% for more than a year despite CPI inflation in the first five months of 2025 averaging 2.2%. By comparison, South Africa ran a 2024 current account deficit of 0.7% of GDP. Its CPI inflation averaged 3.1% in the first four months of 2025 - but the central bank started the year with policy rates at 7.75% and has been able to cut rates twice so far this year. What it means for investorsIn terms of portfolio positioning, we expect global investor concerns about US trade and economic policy to continue driving capital flows into emerging markets. We think this will be supportive of currencies, allowing stronger growth, lower inflation and faster/further rate cuts. This, we believe, is the principal trigger of a positive feedback loop we've seen in emerging economies in previous up-cycles. We prefer domestic-demand-driven emerging markets, with historically weaker current account balances and the ability to cut rates from higher real levels. We remain constructive on the asset class, and overweight Mexico, Indonesia, South Africa and Brazil. |
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Funds operated by this manager: Pendal MicroCap Opportunities Fund , Pendal Global Select Fund - Class R , Pendal Sustainable Australian Fixed Interest Fund - Class R , Pendal Focus Australian Share Fund , Pendal Horizon Sustainable Australian Share Fund , Regnan Credit Impact Trust Fund , Pendal Sustainable Australian Share Fund , Pendal Sustainable Balanced Fund - Class R , Pendal Multi-Asset Target Return Fund |
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This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at December 8, 2021. PFSL is the responsible entity and issuer of units in the Pendal Multi-Asset Target Return Fund (Fund) ARSN: 623 987 968. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient's personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information. Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance. Any projections are predictive only and should not be relied upon when making an investment decision or recommendation. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections. For more information, please call Customer Relations on 1300 346 821 8am to 6pm (Sydney time) or visit our website www.pendalgroup.com |
18 Jun 2025 - Banking breakthroughs
17 Jun 2025 - Investment Perspectives: Thinking about bonds.....and the local school play
S&P 500 increased +6.2%, the Nasdaq rose +9.6%, whilst in
the UK, the FTSE was up +3.3%.
16 Jun 2025 - Glenmore Asset Management - Market Commentary
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Market Commentary - May Glenmore Asset Management June 2025 Globally equity markets rallied strongly in May. In the US, the S&P 500 increased +6.2%, the Nasdaq rose +9.6%, whilst in the UK, the FTSE was up +3.3%. Domestically, the AllOrdinaries Accumulation index also performed strongly, appreciating +4.2%. On the ASX, the top performing sectors were technology and energy. The worst performers were defensive sectors such as utilities and consumer staples, which lagged as investor risk appetite recovered. As was the case in April, growth stocks performed very strongly in May with numerous technology stocks posting double digit gains. In bond markets, the US 10-year bond yield increased +28 basis points (bp) to 4.44%, whilst its Australian counterpart rose +16 bp to close at 4.27%. The Australian dollar was flat in May, closing at US$0.643. Funds operated by this manager: |
13 Jun 2025 - Reframing Net Zero: Investing in a >2°C World
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Reframing Net Zero: Investing in a >2°C World Yarra Capital Management May 2025 With warming very likely to exceed 2°C, investors face a radically altered investment landscape marked by intensifying physical risks, rising litigation and liability, evolving regulation and uneven progress in transition readiness. This paper outlines how we are recalibrating our research agenda and investment process in response to these profound structural changes. Our base case outcome driving our research approach now focuses on an adaptation and mitigation response rather than achieving a net zero outcome. To be clear, we believe we must continue to pursue net zero objectives. However, as fiduciaries, we must take a pragmatic approach to managing climate risks and opportunities. The New Climate RealityThe world has already surpassed 1.5°C of warming[1] (refer Figure 1), and current policy pathways suggest temperatures will surpass 2.4°C this century. Many physical climate events-heatwaves, wildfires, droughts and floods-are accelerating in frequency and severity[2]. The investible universe in Australia and globally is materially exposed to both direct and indirect consequences of this warming trajectory. Figure 1. Global surface temperatures over time relative to pre-industrial baseline
Source: Carbon Brief, Jan 2025. The Intergovernmental Panel on Climate Change (IPCC) 2023 AR6[3] report projects that our current policies and technological trend is pointing to well over 3°C warming by the end of the century, noting that we have already exceeded two-thirds of the global carbon budget to stay below 2°C. Indeed, the current Nationally Determined Contributions (NDCs) under the Paris Agreement[4] are insufficient to limit the world's warming to below 2°C and are now projected to lead to warming above 2.4°C. And in Australia, the growing recognition of this climate reality has led to the appointment of a new position, Special Envoy for Climate Change Adaption and Resilience following the May 2025 federal election,[5] and the recent release of the Australian Adaptation Database[6]. Investment Risks are on the RisePhysical risks are already driving financial losses. For example, Californian utility company Pacific Gas and Electric (PG&E) was forced to file for Chapter 11 bankruptcy in 2019, flagging over US$30 billion in liabilities after being held responsible for equipment failures and downed power lines that started the 2017/18 Californian wildfires, including one blaze which caused 84 fatalities. PG&E's share price is yet to recover and trades today some 3-4 times below its pre-wildfire levels (refer Figure 2). Figure 2. PG&E's share price fell 91% between Sept 2017 and Jan 2019
Source: YCM, Bloomberg, May 2025. Beyond being impacted by physical events, companies are also increasingly likely to be held liable for their contributions to physical events. Climate litigation is expanding. A recent model[7] attributes over US$8.5 trillion in damages globally to top fossil fuel producers. This research extended to Australia's five largest fossil fuel producers over this same period, with an estimated US$682 billion in economic damages directly attributable to these companies. Shareholders, clearly, will be impacted by rising corporate accountability for climate change. Attribution of cost implications of physical events to specific companies will be important to watch. In Table 1 (refer Appendix), we summarise the impacts on companies from physical disruptions as well as the potential liabilities associated with causing physical events. A detailed list of sector-specific considerations is also included in Table 2 (refer Appendix). We are actively analysing these risks to every company that we research, and it now forms a key pillar in our engagement agenda. Portfolio Implications for a Warming WorldAs investors, understanding (i) the portfolio implications of a likely delayed transition; and (ii) the higher physical impacts resulting from climate change are critical. Our process is also evolving. Whereas like many investors we have historically worked to understand the path to targets and the associated risks, our focus has shifted to focus acutely on mitigation and adaptation. We are moving beyond 'net zero pathways' to model how climate outcomes - not just targets - affect value and risk. Our analysis now focuses on physical exposure mapping, litigation trends and adaptive capacity across sectors. Key opportunities include companies enabling climate adaptation, resilient infrastructure, diversified and adaptive supply chains, and carbon removal technologies. We expect to observe: 1. Climate Adaptation
2. More Resilient Infrastructure
3. Increasingly Diversified and Adaptive Supply Chains
4. Greater Investment in Carbon Removal Technologies
Mitigation and adaptation strategies also include specific initiatives to slow down or reverse the effects of global warming (refer Figure 3). Figure 3. Adaptation and mitigation opportunities
Source: Tailwind Climate Adaptation Finance Primer. What We're Doing DifferentlyWith the world on a trajectory beyond 2°C, understanding and navigating the risks associated with this emerging reality is crucial. In particular, we are: 1. Reassessing Portfolio Risks and Implications 2. Refining our Stewardship and Engagement Priorities 3. Positioning for Opportunities The climate investment narrative has shifted from 'if' to 'how much' and 'how fast'. Portfolio resilience now requires a forward-looking understanding of both climate impacts and adaptation dynamics. We are sharpening our research to reflect this new reality and to ensure we continue to deliver value in an era of accelerating environmental change. +++ [1] Source: https://wmo.int/news/media-centre/wmo-confirms-2024-warmest-year-record-about-155degc-above-pre-industrial-level. [2] Source: https://soe.dcceew.gov.au/overview/pressures/climate-change-and-extreme-events; We note that some physical events may have uneven impacts across regions, including some regions, such as Queensland, projected to experience potentially decreasing frequency and increasing severity of cyclones; whereas other risks, in particular, chronic risks are projected to increase in both frequency and severity. [3] Source: https://www.ipcc.ch/assessment-report/ar6/. [4] Source: https://unfccc.int/. The Paris Agreement is a legally binding international treaty that aims to limit global warming to well below 2°C with efforts to limit it to 1.5°C through national commitments to reduce greenhouse gas emissions, enhance climate resilience and provide support for developing countries. In 2015, 195 countries signed this agreement; and as of March 2025, there are currently 196 countries and the European Union who are signatories, representing an estimated 85-90% of global greenhouse gas emissions (following the withdrawal of the United States - which accounts for an estimated 15% of global emissions - by executive order in January 2025). In 2018, the Intergovernmental Panel on Climate Change (IPCC) published a special report noting that limiting the global temperature increase to 1.5°C above pre-industrial levels would significantly reduce the risks and impacts associated with climate change compared to an average increase of 2°C. This included lower levels of biodiversity loss, sea-level rise and extreme weather events such as heatwaves and more frequent and severe storms. [5] Source: https://www.pm.gov.au/media/press-conference-canberra-12may25. [6] Source: https://australianadaptationdatabase.unimelb.edu.au/. [7] Source: https://www.nature.com/articles/s41586-025-08751-3. |
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Funds operated by this manager: Yarra Australian Bond Fund , Yarra Australian Equities Fund , Yarra Emerging Leaders Fund , Yarra Income Plus Fund , Yarra Enhanced Income Fund |
12 Jun 2025 - One Year On: Responsible AI engagement examples and reflections
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One Year On: Responsible AI engagement examples and reflections Alphinity Investment Management May 2025 |
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Artificial Intelligence (AI) is fast becoming a powerhouse for individuals and businesses, offering automation, data-led insights and boosted efficiency. With this huge opportunity, however, comes challenges and risks that need to be carefully considered. With AI uptake moving quicker than many expected, Responsible AI needs to match the pace. Alphinity has been digging into the ethics of AI technologies for quite some time, considering the potential risks to companies, society and the environment. This curiosity led to an exciting collaboration with Australia's premier national science research agency, Commonwealth Scientific and Industrial Research Organisation (CSIRO), in 2023. We co-developed a landmark Responsible AI Framework which was released in 2024. Now, after a year of use, we have some reflections to share. This article highlights AI use cases that we see companies adopting, some of the related ESG risks, and notable company engagements that were driven by applying the framework to our investments. Spotlight: Responsible AI FrameworkIn May 2024, Alphinity and CSIRO released a Responsible AI Framework (RAI Framework) to assist both investors and companies navigate the flourishing AI opportunity. The framework is a practical, three-part toolkit that bridges the gap between emerging responsible AI considerations and existing ESG principles such as workforce, customer, data privacy and social license. The framework is designed to set a standard in responsible AI and can be used flexibly depending on the investor's scope and needs. It is also intended to help companies understand investor expectations around responsible AI implementation and disclosure. The report and toolkit can be explored here: A Responsible AI Framework for Investors - Alphinity Why should investors care about responsible AI today?AI holds significant potential but also presents various environmental and social risks. For instance, the reliance on data centres leads to increased greenhouse gas emissions, which may result in climate change-related risks, including carbon pricing. Additionally, their high water usage could need to be restricted during droughts, or be subject to future regulations as recently proposed in Europe. The business stability of entities within the AI value chain could be adversely affected if these issues are not promptly identified and managed. These risks are prevalent throughout the AI value chain, from semiconductor producers to software providers, but are particularly significant in the short-term for hyperscalers such as Microsoft, Alphabet, and Amazon. AI can help drive automation, supercharge productivity and assist with the performance of repetitive tasks. But what happens when workers are displaced, or when the AI tool hallucinates or malfunctions? Employees and unions could react, creating social tension and affecting customer service. Wider operational disruptions and/or cybersecurity issues are also possibilities. A consideration in the healthcare industry is to balance the cost and timing benefits around clinical trials and product development, with the potential risks to data quality, bias and real-world validation of AI-lead drug discovery. We believe that in order for AI opportunities to be realised, the governance, design, and application of the AI needs to be undertaken in a responsible way, considering any environmental, social, and evolving regulatory considerations of AI and mitigating these impacts wherever possible. To help us think through these implications, we take a use case first approach. That is, we identify the relevant use cases by sector or company, then assess the relevant ESG considerations including the company specific mitigation efforts. This has supported more proactive and targeted research and engagement with companies and has enabled us to better identify and integrate the various risks and considerations into our ESG assessments. This approach has been illustrated in the table below. It presents some of the more common use cases, some company examples and the relevant ESG threats and/or opportunities.
40+ company meetings: Continued engagement on responsible AISince publishing the framework, our focus has been on assessing responsible AI risks and opportunities within our investments. Building on the 28 company interviews conducted in 2023 for the research project, our engagement with portfolio companies and prospects has continued. These discussions not only shed light on how AI use cases are evolving, they also help us to assess how responsible AI practices are progressing. Since publishing the report in May last year, we've undertaken a further 15 engagements where insights from our RAI Framework guided the discussions. We shared our framework with organisations such as Wesfarmers, Medibank, AGL, Origin, Aristocrat Leisure, Netflix, Intuitive Surgical, Novonesis, Mercadolibre, Thermo Fisher, CaixaBank and Schneider Electric. The RAI framework has been a practical way to communicate the types of information investors seek to evaluate AI-related risks. Pleasingly, companies like Medibank and MercadoLibre have said that the resource has been helpful to guide internal responsible AI practices. Insights and examples from these engagements are categorised into: Financial services, Healthcare, Technology products and platforms, and Industrials and energy services. Financial servicesCaixaBank: AI Investment Guided by Governance Framework CaixaBank, a prominent Spanish bank, is investing €5 billion in AI to benefit millions of customers. The bank has seen early success with AI in customer service claims, call centre operation, and code generation. There are regulations in the European AI Act that require additional controls and governance mechanisms to ensure the quality of AI outputs in the banking sector. We spoke with the Head of Data Governance to explore the bank's responsible AI approach, confirming preparedness for AI regulation. The company's AI Governance Framework ensures oversight of AI applications and adhered to principles like cybersecurity, fairness and reliability. We recommended that CaixaBank publish a responsible AI policy and disclose more on AI implementation to further enhance its leading approach. Commonwealth Bank of Australia (CBA): Advanced Technology and Responsible AI Strategy CBA's responsible AI strategy is globally recognised, leveraging the company's advanced technological background and ethical AI programs since 2018. Ranked first in the Evident AI Index for leadership in Responsible AI, CBA collaborates to manage regulatory and reputational risks. The bank introduced a Responsible AI Toolkit in 2024 and completed 15,000 modules on Generative AI and Deep Learning. We view CBA's approach as leading and are supportive of its ongoing disclosures to shareholders. In 2023, we provided feedback to CBA that it should consider publishing its Responsible AI Policy. The Bank published this policy later the same year and is presently one of the only Australian companies with a publicly disclosed position. HealthcareMedibank: Leveraging AI for customer service and healthcare analytics In early 2024, we engaged with health insurer Medibank to explore AI opportunities in healthcare and the way in which it considers related implications such as data privacy, bias and customer trust. The company has been using AI to support customer call experiences and to improve healthcare analytics. Medibank has established an AI Governance Working Group that evaluates each AI use case before implementation, to consider aspects such as customer, reputation and data risks. We are pleased to share that Medibank has adopted our Responsible AI Framework to benchmark its own practices. Medibank is also considering our feedback on publishing a responsible AI policy and disclosure on AI governance implementation. Intuitive Surgical: Enhancing minimally invasive surgery and patient outcomes with AI US medical device company Intuitive Surgical is a pioneer in health technology and has moved to improve robotic surgery processes through machine learning and predictive analytics. We engaged with the company to better understand these exciting use cases and explore its responsible AI strategy. For instance, postoperative recommendations have become more effective as they combine surgery indicators, such as blood loss or operating time, with patient outcomes like pain levels and recovery. Future opportunities point to AI being used within surgery, for example staplers using AI to measure and adjust tissue compression in real-time to help with precision and patient recovery. The company manages cybersecurity and data privacy to high standards, and we suggested that publishing a responsible AI policy that outlines governance - including its management of important risks like bias and quality control - would be useful to investors. Thermo Fisher: Enhancing healthcare through AI, overseen by a bioethics committee US healthcare company Thermo Fisher Scientific has been using AI and machine learning for many years to streamline internal operations and improve productivity, especially in clinical trials where AI can support disease detection, drug discovery and diagnostics. We engaged with the company to learn more about these AI applications and responsible AI considerations. Thermo Fisher highlighted the role of its bioethics committee, which was established in 2019 and has subject matter experts developing a policy commitment, in guiding its responsible AI activities. We provided information on our Responsible AI Framework and encouraged the publication of the policy in line with best practices. Technology products and platformsNvidia: Launched an AI Ethics Committee and customer KYC process Nvidia is a renowned AI enabler which supplies more than 40,000 companies, including 18,000 AI startups. Early in 2025, we had a meeting in which we discussed the balance between sustainability solutions which could be brought by AI, with the energy and water needed to power these tools. Nvidia highlighted that AI provides many exciting solutions like advanced weather modelling for adaptation and resilience, enhanced maintenance practices via digital twins, and automation and route optimisation to lessen carbon emissions in manufacturing and transport. The company is working to disclose these different end-markets, along with energy and water use, which will offer greater insight into Nvidia's sustainability contributions. Nvidia also established an AI ethics committee in 2024 to oversee the development of AI with an emphasis on trust and ethics. The committee's initial focus was to identify new AI use cases and develop a framework to recognise potential risks in product development and customer use. For instance, the committee recommended additional testing and the implementation of guardrails for a specific product, which subsequently increased due diligence requirements for sales to certain customers. These were subsequently adopted by the development and sales teams. We feel this demonstrates a good level of responsible AI integration through the business. Aristocrat Leisure: Balancing innovation with responsible AI We conducted a responsible AI assessment utilising our framework and engaged with Aristocrat Leisure to understand the AI use cases across its business. We learned that the more recent generative AI use cases include coding, creative development, marketing and general employee productivity. The company has an AI governance program which includes regular use case reviews by a central AI Working Group. This is a good structural model and the Board receives updates at least semi-annually. Aristocrat has also engaged external advisors to provide additional guidance on responsible AI. Workforce impacts and employee sentiment are being considered through employee surveys that measure the impact of AI tools. Overall, we observed that Aristocrat is adopting new AI tools, had a good level of workforce adoption and is building a good foundation in responsible AI. We provided feedback that a responsible AI policy would be a good next step. Industrials and energy servicesSchneider Electric: Enhancing AI and industrial automation Since 2021, French electrical parts company Schneider Electric has expanded AI hubs in India, France, and the US to improve electrification, energy efficiency, and automation. It plans to invest more than $700 million in the US to enable AI growth, domestic manufacturing and energy security, creating 1,000+ new jobs and boosting digital capabilities. In December 2024, we engaged with the company and discussed AI opportunities and responsible practices. Its AI solutions follow strict governance and ethics standards, managing bias and discrimination through a responsible AI program. A broader AI strategy for 2025-2030 is in development, and we provided our research report as feedback. We also recommended publishing an AI policy to enhance confidence in managing AI risks and opportunities. AGL: AI in energy networks AGL Energy has been using AI for some time in various areas, including energy generation, network maintenance and in the electricity retailing part of the business. AGL introduced a relatively recent technology strategy in which AI is one of the four key pillars, and one of the significant use cases discussed was in predictive maintenance. AGL is on the journey to embed responsible AI practices into its operations and are considering suitable governance structures. Reflections and conclusionAs companies continue to invest in AI, the transformative business impacts are becoming increasingly clear. As described in the company engagement examples above, AI's potential is evident in areas such as healthcare, industrial automation, energy management, and improving general productivity through processes like coding, customer service and marketing. From a responsible AI perspective, we have noticed an increase in cross-functional governance structures and policy commitments, as well as a growing awareness of the legal, ethical and ESG risks that come with AI deployment. In terms of external benchmarking, there has been some progress including the finalisation of the ISO27001 AI Safety Standard, which indicates a trend towards verified AI systems. Important disclosure metrics related to responsible AI, however, as detailed in the deep-dive component of our framework, are still in early stages. We would like to see metrics such as the number of AI-related incidents, energy usage from applying AI, cost savings from AI, the number and outcomes of AI audits, and the number and types of complaints related to AI. With 'agentic AI' now the next frontier, we are aware this will bring another level of complexity to AI decisions. We feel that responsible AI governance structures, such as those outlined in our framework, can help organisations to harness AI opportunities, while steering away from some of the risks. Therefore, the three main engagement priorities for portfolio companies are:
Regulatory developments continue to progress (for example, the EU AI Act and the recent AI Action Summit where a joint declaration on inclusive and sustainable AI was signed by 58 countries) but we have observed that no significant or compelling regulations have emerged recently. As such, we continue to monitor resources such as the World Benchmarking Alliance's Digital Benchmark as well as newer benchmarks like the Evident AI Index, which offer useful insights. We have also been broadening our research scope to benchmark and evaluate the ESG risks within the AI value chain, including emissions, energy, and water usage in data centres. We hope to be able to share more on this in future. |
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Funds operated by this manager: Alphinity Australian Share Fund , Alphinity Concentrated Australian Share Fund , Alphinity Sustainable Share Fund , Alphinity Global Equity Fund , Alphinity Global Sustainable Equity Fund
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