‘ESG investment is an unstoppable force’

Edward Mason, Head of Responsible Investment at the Church Commissioners for England, discusses why ESG investment is unstoppable, highlights the importance of effective engagement with companies, and argues that extractive companies with an adaptable mindset are the ones that will thrive in a low-carbon world.

Edward Mason has served as Head of Responsible Investment at the Church Commissioners for England since 2014. The Church of England is a leading voice on sustainable investment and plays a key role in the global investor campaign Climate Action 100+, which aims to ensure that the world’s largest corporate emitters take necessary action on climate change. Prior to his current role, Edward worked as Secretary of the Church of England Ethical Investment Advisory Group (EIAG), spent 15 years as a British diplomat and helped establish the diplomatic advisory group Independent Diplomat.

ESG investment is an unstoppable force, despite teething issues

Edward Mason

“ESG investing is on a growth trajectory. It is fundamentally a good thing and it is unstoppable. A key driver of the increase in ESG investment is a wider recognition that behind companies stand investors, who need to be held to account and align themselves better with society. The other is that ESG issues are ever more material. Sustainability challenges facing businesses are growing as we put more pressure on the ability of the planet to sustain us. These are major issues for modern business, and investors ignore them at their own peril.

Of course, there are all kinds of teething issues. It is very much a developing area and work in progress. The lack of sufficient and comparative data, for example, is a hindrance to good sustainability analysis. As a result, there is now a big appetite for ESG disclosure from companies. This needs better dialogue between investors and companies about what exactly is required.

ESG issues in the extractive industry are going to pose an ever greater challenge. The recent collapse of Vale’s tailings dam has shown that mining waste is a huge problem. Water is becoming a major challenge globally, including for the extractive industries. Political pressures are rising, as demonstrated by global climate protests and increased support for green parties. Social and community voices are getting stronger, and the ability of communities to delay or even thwart extractive projects is growing.”

Oil and gas companies can use different low-carbon strategies, but need an adaptable mindset

“We see oil and gas companies developing different transition models, reflecting the fact that a range of strategies can be employed to adapt to a low-carbon world. One model is to increasingly transition the business and pursue a diversified model, whereby you are active in oil and gas but also in new energies, as Shell and Total are doing. The other model, closer to BP’s, is ensuring your capital investments are robust in a two-degree scenario. Both strategies are perfectly legitimate, but fundamentally a pure oil and gas business does not have a very long-term future if you look at it in the lifespan of the Paris Agreement and the need to get to net zero emissions.

A key challenge for extractive companies is the need to become smarter and evolve. Adaptability of mindset is going to be critical for oil and gas in particular, because things can change quickly, as seen with the rapid implosion of the financial crisis, the change in public opinion on climate and plastics, and the rise of populism. In a world in which we are already above one degree of warming, already over 400 parts per million of CO2 and already seeing extreme weather events, the pace of change is not going to be slow. Companies with an adaptable mindset are the ones that will thrive, not the ones who are convinced that their business is not going to change much.”

All companies will be held to the same standard

“European companies have taken greater action and engaged more thoroughly than North American ones, though there is no obvious reason for this misalignment. In today’s global world, investors have the same expectations of companies in different markets. We all want the same quality of engagement on the most important long-term issues that these companies face. An effective dialogue is important because both companies and investors have things to bring to the table.

More attention is also already focused on bigger emerging-market players. Some of the large Russian and Chinese companies are within the ambit of the global Climate Action 100+ initiative and are increasingly being engaged. This trend will continue as investors work towards closing the existing gaps. There will not be any free passes in investors’ portfolios.”

As a responsible investor, the Church is prepared to be assertive

“The mining industry fulfils an important role for society. Modern life and the low-carbon economy depend on the metals and minerals that the industry produces. The same applies to the oil and gas sector – its products are necessary for today’s society and our economy depends on them.

However, the extractive industry is probably the single most impactful one on the planet in terms of environmental and social consequences. There is a divestment campaign within the Church relating to fossil-fuel producers. When there is a problem at a company, some people say to us ‘why are you invested?’. Our view is that engagement is a very important part of who we are and that using our voice successfully to effect change is in fact the most productive thing that we can do as an investor.

These are complex challenges, and we try to approach them in a sophisticated way to do full justice to the complexity. We want to be a constructive force helping companies find solutions to the challenges they face. However, we are ambitious as well and if companies are not responsive to engagement, then we are prepared to escalate and be assertive about our views. Exxon is an example of where we think a company has not been doing enough. We have been prepared to go public on that and to use our rights as shareholders to advance that case.”

Investors will not tolerate repeat corporate offenders

“You cannot have companies that kill 300 people in one incident, that is just not acceptable. One of the reasons why the Brumadinho dam collapse has had such an impact is that Vale is a repeat offender [another Vale tailings dam collapsed in 2015, killing 19 people and causing severe environmental damage]. If there is one thing that investors do not like on ESG, it is repeat offenders. We are supportive of the value of the industry, but mining needs to be done in a responsible way. We expect companies to learn lessons and put things right.

Overall, the mining industry has largely been improving, despite Brumadinho. There is a lot of good practice, and ICMM has been at the forefront of much of it. However, one of the key challenges for the industry is the wide variation in the quality of standards. The industry’s license to operate and reputation will be affected by what happens at the worst performers, so raising standards must be a collective effort.”