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Where are the animals in Environment?

Now that ESG (Environmental, Social & Governance) issues are accepted as a key part of investment, including Super and pensions, it is time to look more closely at the ‘E’ and the ‘S’.

E is for Environment – the problem with focussing on environment is that, well, it just looks at the environment.  This isn’t meant to be as obvious as it sounds.  It looks as though the investment community uses the E word to describe immediate impact rather then necessarily concentrating and long term impact and sustainability issues.  If genuine sustainability and long termism were applied to investment strategies, then the impact that farmed animals have on the environment would have to be taken into account. Personally, I have yet to see any reference to intensive farming methods anywhere under the E in ESG.  With taking this into account, it is difficult to see how any environmental strategy is anything other than a token exercise.  That’s not to say that working to minimise environmental impact is not important, of course it is.  But far too often the focus is on dealing with things that have a small impact whilst avoiding those areas that have a much greater impact.  Logically, for every reference to tackling emissions from cars one would expect to see three to four references to reducing the amount of meat consumed and the number of cattle raised.  According to much recent research, farmed animals have a greater impact on climate change than cars – so where is the ‘A’ in the ‘E’?

S is for social – taking into account social issues is problematic to say the least.  If an investment company looks too deeply into ‘S’ issues, they run the risk of bringing in a new ‘E’.  This is not the E in environmental, but the E in Ethical.  Human rights is a classic example of how the investment community can touch the edges of the S without running the risk of the S becoming an E – with me so far? Many fund managers now, quite rightly, look for risk in the way a company impacts on people; employees and the local and wider community.  If a company employs child labour and this is exposed in the media, there is a strong chance that the company’s reputation will be damaged and, therefore, a risk that its share price might be adversely affected.  Reputational risk is something all investment managers should be sensitive to.  Few mainstream investment managers, however, even when they claim to be applying ESG factors in their stock selections, will avoid companies who can demonstrate good management of their human rights problems.  This doesn’t mean that the companies don’t have problems; they do have them but manage them in such a way that either it is unlikely the information will get out or those impacted have no way of letting the rest of the world know what is happening.  In this instance, investment managers would rate companies as a good investment, even though many of those handing over their Superfund money would not consider the use of child or slave labour, the forced relocation of communities or the destruction of indigenous lands to be acceptable. The issue here is that the naughty E word – ethical – covers the ‘abuse’ side of human rights whereas S for Social covers the softer, more manageable side.

 

The above are examples are areas that I will be retuning to in this Blog.  Whilst it is wonderful that long term investors, such as Superfunds, are beginning to accept the importance of ESG issues (don’t get me started on the G – that’s for another time), it is also important that members of Superfunds are not lulled into a false sense of security that their money is in anyway doing anything ‘good’.

The main article on which this Blog is based can be found at:

http://www.thesustainabilityreport.com.au/finsia-esg-consistent-with-superannuation-fiduciary-duties/1749/

 


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