Dunbar feels that the transition and process of change is of high importance. He points out that, sometimes, some of the companies traditionally thought of as ESG offenders do in fact hold the tools, such as infrastructure, to roll out and maintain effective alternative solutions.
An inclusive, engaged approach
Therefore, rather than exclude or screen out these companies, many fund management groups tend to engage with investee and potential investee companies.
Managers collaborate, have conversations and gauge where the companies are in terms of progress and plans, and what their intentions and capacity for change are.
Sometimes, this takes a long time – and an element of realism and understanding is needed. Dunbar comments: “To facilitate the carbon transition, for instance, we still have to dig up iron ore, as we need that to build the turbines.
“Therefore, it is wildly simplistic to say I will create you a ‘low-carbon portfolio’ by not investing in these highly intensive and somewhat polluting companies.
“It is much more difficult, but much more effective, to invest in those companies who are least environmentally damaging but participating in the carbon transition.”
Dunbar says that for ESG investing, it is “the process of change that matters, not the carbon snapshot of data”.
He adds: “Somebody is going to have to keep making steel, but those companies who are doing it in the least damaging way are likely to be on the right side of regulations, and that’s the opportunity.”
Steve Nelson is insight director at the financial consultancy company the lang cat. Asked what he considers necessary for successful ESG implementation, when it comes to developing technology such as platforms and data-driven tools, Nelson says for him “all roads lead to disclosure”.
“Where data standards improve and work alongside reporting tools to shine a light on what’s going on under the bonnet of investment portfolios, this in turn will help inform better conversations with those clients who choose to engage in the subject.”
Giving people a leg-up
On a more macro level, Dunbar offers a final thought: “It’s important to remember that the social and the environmental are intrinsically linked: people who are socially disadvantaged or in countries with low levels of income are often simply not in a position to pay higher prices for more carbon-friendly business practices.
“All else being equal, this suggests that a greater focus on distribution of income (both domestically and internationally) is also necessary to accelerate global progress on tackling climate change.”
For clients just starting out on their ESG journey, or perhaps for younger investors who do not have much in the way of savings, one method of redistributing income is endorsed by Jack Chellman at the Global Returns Project.
