Francis Condon: Our response to climate change can’t ignore social aspects

Sustainability is a very significant backdrop to business and the investment decisions that are based on business. It has become an important part of investment decisions with regards to what is material to a company, how the company is managing it and what’s emerging as a result. It also offers us a view as to what’s coming down the track and how the company is planning to manage it.

Materiality is another aspect; how a company is affecting the environment, according to environmental science. We often see feedback loops, with a company affecting its environment, which leads to other changes that in turn affect the company. So, it’s important for investors to manage that likelihood or try to anticipate it.

The investment industry has evolved. A decade ago, most of the sustainability work in London was based around socially responsible investing. A few years later it moved to a focus on environmental, social, and governance (ESG) ratings. Today we use ESG ratings as a starting point, and from there take a more focused view on how material sustainability issues are to individual companies and incorporate this into our investment decision.

Sustainability will continue to evolve, but the eventual goal is to ensure sustainability criteria are considered in all forms of investing, not just sustainability or responsible investing portfolios.

It’s important that climate gets a big focus, as it’s a big and complex problem. But the thematic engagement team I lead also focuses on other topics on the social side, such as human rights, labor relations, and health.

In terms of evolution of the discussion, it’s worth noting that a lot of climate discussions have moved a long way beyond the disclosure of carbon emissions and now consider company strategy targets and action plans, plus what energy transition looks like in the social space.

If a company closes a coal fired power stations that employs 100 to 200 people and replaces it with a solar power panel power generation that needs only five people, there are big questions about social implications.

If they don’t manage this transition properly, you end up with major resistance to making that change in the first place.

We have had a climate engagement program for nearly six years that started off as disclosure standards based on the Taskforce on Climate-related Financial Disclosures but has evolved towards the direction of what Net Zero would look like. Essentially, it’s changed from reporting standards to future-looking action plans and implementation plans.

On the environmental side we are looking at how to move forward with natural capital. We are members of Nature Action 100, which is a collective group of investors engaging on natural capital. We also have a team member on the advisory board of a PRI working group that is looking at natural capital too.

On the social side, we analyze human rights, human capital, diversity, equality, and inclusion, labor relations, and health. Our thematic research work tries to take what we learn from engagements and bring it to the portfolio managers. It has done work on areas such as critical minerals and toxic chemicals, particularly so called forever chemicals (PFAS or per- and polyfluoroalkyl substances) as well as green hydrogen.

Part of what we try to do is make sure we identify themes as they start becoming more apparent. One example is biodiversity, which has been talked about for over 10 years but only seems to be truly arriving in the investor space now.

I believe that water is one area that may need more focus, particularly potable water availability and quality. How do you use potable water and what happens when you discharge things into the sources of potable water?

You are starting to see examples of these issues becoming evident in the Andes, where water stress is becoming significant in some places. Some companies have begun building desalination plants on the coast as it is easier to do than compete with local communities for sources of water. Similarly, there are major water challenges for the southwestern USA or northeast China.

To be honest, it’s our human ingenuity and adaptability. Plus, I have hopes that we ultimately care for our young and each other.

It’s important to recognize that we need to be more conscious of how much we consume. There is still a lot of stuff in the world, and I think we all need to have a better awareness of our material consumption. I’ve significantly reduced my meat consumption. Meat production has a very high carbon footprint; if we all ate less it would make a huge difference. It’s also important to consider how much we fly too. There has been criticism of the number of people flying into COP28 in Dubai, for example, and 80% to 90% of its emissions originate from these flights. But the same is true of The World Cup in Qatar, of the Rugby World Cup in France this year. We need to be more thoughtful about flying in general as we look to reduce the global carbon footprint.

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