Trying to do the right thing can be difficult. Even if your moral compass is fine-tuned, doing right by some people can mean doing wrong by others.
This can make it harder to be a responsible investor. There are many grey areas and trade-offs. Take electric vehicles. Investing in them will be better for your investment portfolio’s carbon emissions, but many electric vehicle (EV) batteries require cobalt. The mining of this precious metal is mired in controversy given the poor labour conditions in many large cobalt mines, particularly in the DRC.
Being a responsible investor means being mindful of these kinds of grey areas and unintended consequences.
“The essential issue for us is that climate change is as much a socioeconomic problem as an environmental problem,” says Ashley Hamilton Claxton, head of responsible investment at Royal London Asset Management, part of the Royal London Group.
The issues involved are often nuanced. And while seemingly-simple green actions might look good, they may not always be terribly effective.
“I’m Canadian, by birth,” she says. “I have family who work in the tar sands industry in Alberta.” The Canadian tar sands lie under vast swathes of boreal forest. Extracting petroleum from them requires huge amounts of energy and the removal of the (often virgin) forest before you even consider the CO2 the oil will emit when burned. They are a bete noire for environmentalists, but they provide employment in remote areas.
“The way that you don’t solve climate change – or get people on board to help you solve climate change – is to put them out of a job,” says Hamilton Claxton. “You will lose hearts and minds.”
This is the thinking behind ideas such as “a just transition”, which many companies and investors are now proponents of. A just transition was developed by the trade unions movement, and the idea is that it provides a framework to help countries and industries (such as coal and oil) move to a sustainable, net zero, biodiverse economy, but in a way that protects jobs and livelihoods. It brings together sustainability and social justice.
“We’ve been asking companies in our portfolios to come up with a just transition plan,” says Hamilton Claxton. “We want people to make a behavioural change plan, not just reallocate their capital. You might look at what you’re doing about training and repurposing sites if you close one down. What happens to local jobs? Could you transition that site to be doing something different and retain some of those jobs? How can you work with local partners, if you do have to close facilities down? The idea is to bring people along with you.”
A number of companies have recently published commitments to a just transition. Scottish Power is one. Its plan takes in not just green energy but also working with customers to ensure bills do not become too onerous, and with communities to safeguard jobs.
Scottish and Southern Energy is another. When its just transition plan was published last year, the company’s chief sustainability officer, Rachel McEwen, said: “The rapid move towards net zero brings a risk that some people are left behind. We are clear that it is in everyone’s interests that fairness is baked into net zero transition plans.”
This type of joined-up approach is the next iteration of the move to value companies against environmental, social and governance (ESG) criteria. It also answers one of the biggest criticisms of the environmental and social justice movement – that its ideals are what the commentator Rob Henderson has termed “luxury beliefs”. These, he explains in a YouTube video, are “ideas and opinions which confer status on the upper class while often inflicting costs on the lower classes”.
The just transition approach is therefore more equitable and, often, more effective as it encourages communities who could lose out to the decarbonisation agenda to back measures that protect the environment, even if those measures will initially affect their primary occupation.
The governance side of ESG can also throw up surprising considerations, such as the importance a company places on cybersecurity, which is essential for safeguarding their customers’ digital assets. Hamilton Claxton says: “We’ve been trying to proactively engage with companies about what they’re doing around cybersecurity and making sure they’ve got the correct sort of board-level oversight of it.”
The good news for retail investors is that much of the complex thinking around ESG is done by fund managers, who decide where to allocate money, and present their research in an easy-to-understand way to consumers.
However, the world of ESG investing is changing fast and will continue to do so. “I was reading something about the metaverse recently and thinking about everything from privacy to gambling addiction in a virtual world,” says Hamilton Claxton. “It’s going to be incredibly intellectually challenging from a responsible investing perspective.”
Learn more about responsible investing by heading to Royal London – The Invested Generation
