International and domestic asset owners are increasingly focused on ensuring communities and workers have fair and equitable treatment as the decarbonisation of the global economy accelerates.
While the focus over the last five years have been on climate change, investors are recognising the importance of social issues and that these can help or hinder the energy transition.
“Climate changes isn’t a single problem statement; when you’re just talking about the emissions, you’re forgetting about the fact it is a structural transformation to a low carbon economy,” UniSuper’s manager ESG Jodie Barns tells Investment Magazine.
“That in itself is a multi-problem statement, because what it requires is a very complex societal, environmental and economic transformation.
She adds the net-zero emissions goal won’t be achieved without an economic transformation.
“It does require trade-offs between social and economic and environmental issues to ultimately achieve the carbon reduction component of it,” she says.
There are several reasons why social issues have lagged environmental and governance explains Will Martindale, co-head of sustainability in London at UK and Dutch asset owner Cardano, one of the largest master trusts in the UK. The fund manages over 2 million members through NOW:Pensions with $28 billion AUM as of December 2022.
Martindale says social issues tend to be personal and how inequality is defined differs with different political groups.
“In the UK, we benefit from all major political parties supporting the concept of net zero and decarbonisation,” Martindale says. “But when it comes to social issues, there’s not quite that political clarity, which makes a more difficult set of issues for trustees and investment decision makers.”
The reporting and measurement of data relating to social risks are also less consistent and available compared to climate data. There is also less academic and sell side practitioner evidence to demonstrate the link between addressing social issues in portfolios and financial performance, he says.
A risk to solve
First Super’s chief executive Bill Watson says governments see social disruption as an issue to be managed and not a problem to be solved.
He cites the example of the devastation to timber workers and their families after environmentalists successfully campaigned for logging to stop.
“We’re now seeing that occurring in extractive industries as well,” Watson says. “The issue for us there is not the path to net zero but the just transition. The Bowen Basin in Queensland for example employs a lot of people, if you shut down the coal industry tomorrow as some people would have us do, that would be economically devastating.”
First Super draws its members predominantly from the mining sector – particularly thermal coal producers – which is facing overwhelming pressure from environmentalists to improve processes or cease operations altogether.
“We have a different view when it comes to extractive industries, mining and the like, we take that there’s a view that there’s room in the world for extractive industries,” he says.
In recognition of the adverse social impact of the drive to net-zero, the Labor government is establishing Transition Agencies in regional areas most affected by the transition, modelled after the UK and Spain. “Ultimately there is a really required role for government in this process, and that’s why it’s been good to start to see some of that architecture [like transition agencies],” says UniSuper’s Barns.
Many large asset owners actively engage with their investee companies – both in the public domain and more so privately – on a range of ESG and other issues.
Cbus acting CIO Brett Chatfield told Investment Magazine in a recent interview that engagement is a key feature going forward.
“We engage very heavily with corporates, particularly in the Australian market, and are very active in terms of advocacy and other issues which are important for our members in terms of long term, sustainable returns,” Chatfield said.
With around 80 per cent of its $115 billion-plus asset portfolio internally managed, UniSuper conducts nearly all its engagement in-house, says Barns. “The types of conversations we’re having is to understand how companies are thinking about a just transition. What are the principles that underpin it.”
The public discussion with BHP around the 2030 closure of its Mount Arthur thermal coal mine is an example of UniSuper’s active engagement Barns says. “If you think about the role Mount Arthur has in the Hunter Valley, the economic diversification for the Hunter Valley is going to be challenging and having a 2030 closure date we think is acceptable.”
“We disagree with anyone pushing to close that earlier purely from an emissions point of view because that [2030 closure date] gives the communities time and space to do that [transition] work and that is what I’m talking about those trade-offs,” Barns says.
On the other side of the scale spectrum, the $4 billion First Super advocates on these issues through its investment strategy. In March, the fund appointed IFM Investors to manage around $320 million in a new indexed international equities strategy focused on labour rights.
“We are only a small investor, so the tool of engagement if you’re a really large investor is not available to us,” Watson says. In time, he hopes the strategy will attract more capital to gain more leverage to achieve the same outcomes.
‘Do no harm’ disclosure is insufficient
The International Sustainability Standards Board has launched a consultation on biodiversity, human capital and human rights in the next phase of disclosures.
Meanwhile, in Australia, the Australian Sustainable Finance Taxonomy is framing social risks around “do no harm” disclosures.
But the concept of “do no harm” is no longer enough says Luba Nikulina, chief strategy officer at IFM Investors in London. She says legislation such as the Modern Slavery Act needs to move to “an outcome-based framework” which is “measurable and tangible”.
In the recent review of the Act – the UK and Australia are the only two countries in the world to have enacted this legislation – IFM advocated “to move from pure disclosure into improving practices, and for companies to report on how they improved practices, which is much more outcome based,” she says.
Regulators need to recognise the huge compliance burden put on the industry. “Companies, asset managers and asset owners are at the moment drowning in the reporting requirements from various countries,” says Nikulina.
This is acceptable as long as the reporting is useful for decision making and capital allocation and it “helps us manage those investments once we own them in a more intelligent way. It’s moving in the right direction, but it’s not there yet.”
Additional reporting by Glenda Korporaal.