The present conflict in Ukraine has led to questions being asked around the world about the impact energy policies have on wider society, and in particular how the transition to a lower carbon world can be engineered in a way that is fair and balanced in how it impacts people and companies at every level.
Ben Constable-Maxwell, head of sustainable and impact investing at M&G, says: "The transition has to happen in a fair way, or it will not gain wide social acceptance, and without that, it becomes much more difficult to achieve a transition to a lower carbon world.
"It is part of the wider ESG story, though. The transition is the E, or environmental concern, but the impact of it is the S, the social or human consideration. And whenever we look at an investment, we consider the human impact as well.”
An example of where the two considerations may come into conflict is in the production of electric vehicles. Such vehicles are of course more energy efficient than vehicles powered by the internal combustion engine, but the manufacture of those cars involves the use of commodities mined in parts of the world where forced and child labour has been known to occur.
The same considerations apply to solar panels, which Constable-Maxwell says use a particular metal “and 80 per cent of the world’s supply of this metal comes from the Uighur region of China, which has issues around human rights and forced labour.
"So when we are talking to solar panel manufacturers, we need to be sure they have the right protocols, that they know what is in their supply chain. The analysis we do to ensure this is complicated, hard work.”
He adds that an area where both the public and private sector may need to be involved is in re-skilling workers who presently are employed in areas of the economy that are likely to shrink in the coming years as a result of the change to lower carbon economies.
Governance
Thede Rust, head of emerging markets debt at Nordea, places concerns such as these within the G (governance) segment of ESG investing, and says: “If a firm has poor governance on issues such as labour, then it is likely they will have poor governance in all areas, and of course that reduces the likelihood of the company repaying you the bond, so we would see the financial risk as very much part of the financial risk of investing in such an asset.”
He says he also tries to engage with governments before investing in their sovereign bonds, in order to see if the direction of travel is the right.
"We were one of the first funds to sell Brazilian government debt, when a new leader came in, because we didn’t like the direction of travel. Now I think most funds avoid Brazil on those grounds. And the thing is, as a bond fund manager, we get plenty of opportunities to have conversations with these governments, because they constantly need to raise finance via new bond issues.
