An integrative approach to responsible investment

This summary outlines the responsible investing approach adopted by various First Sentier Investors investment teams across the globe. It involves a holistic way of thinking that addresses multiple impacts across multiple environmental, social and governance (ESG) measures. We believe it can lead to better long‑term financial and sustainability outcomes, across more measures, than more traditional frameworks.

Many traditional ESG frameworks use data inputs that delineate between ESG factors. Often, that means they don’t take into account the inter‑reactions and flow‑on effects of impacts areas outside those individual areas.

For example, a positive ESG impact by one measure – say, a reduction of carbon emissions through adoption of renewable energy – may also have a negative effect outside of that measure – say, social impacts due to fossil‑fuel based job losses or unethical labour practices in the production of solar panels.

Because they fall outside the ESG measures applied, negative investments impacts may not be fully taken into account. Over time, this may result in a negative overall impact both for investors and the wider community – in direct contradiction to ESG goals.

Similarly, using ESG measures that overlook some positive effects of an investment – say, increases in average income and better educational opportunities for remote communities due to mining investment, may not be maximised. The result? Potential loss of opportunities for investors and communities alike.

A holistic, integrative approach to responsible investing aims to identify and, where possible, more widely address likely inter‑ reactions and flow‑on effects. That includes both the synergies – or potential positives – and the trade‑offs – or potential negatives.

In this way investors can identify opportunities that might otherwise be missed. Similarly, investors can help mitigate the risks of trade‑offs that might otherwise erode long term value and sustainability.

A further advantage of this approach is that it meets the different ESG goals of different investors. It can both help create a more stable and sustainable environment, society and economy and address risks and/or identify opportunities to support better investment outcomes.

In short, while ESG trade‑offs cannot always be avoided, in our view they should be understood, acknowledged and, to the extent possible, addressed.

In the following case studies featuring investment teams across First Sentier Investors, we show this integrative approach in practice, with a particular focus on some sectors and businesses where ESG considerations have a major potential impact on investors, communities, the environment and, by extension, wider society.

Supply chains showing the way: the issue

Today’s long and complex supply chains pose significant challenges for companies trying to manage a range of interrelated sustainability risks. Typically, such risks may include climate change, deforestation, pollution, human rights and, in particular, labour rights and worker safety. Add to this the need for compliance due to increasing regulation – including across international boundaries – and growing consumer activism, and the need for vigilance and transparency to promote supply chain sustainability has never been greater.

What an integrative approach looks like: Smallholder Farmers

Smallholder Farmers (SHFs) are farmers with ‘limited resource endowments relative to other farmers’¹ and are one of the world’s largest agricultural producer groups. More than 500 million smallholder farmers account for the production of up to 80% of certain crops and are often the primary source of key products for multi‑national companies.

The complexity and opaqueness of typical SHF supply chains has high potential to challenge investors on multiple measures, due to vastly variable cultural, geographic and operating environments. Their widely differing characteristics can make ascertaining and addressing supply chain risks difficult.

Cases in point

Consumer goods companies supplying palm oil, cocoa, coffee, sugar and rubber sit squarely in the SHF supply chain frame. In 2021, Stewart Investors commissioned research which identified 14 key sustainability issues faced by SHF supply chains. Ensuring active investor engagement to seek deeper insight into all production and distribution‑related activities, despite the difficulties, is vital. Investors and management can use these insights to help develop tailored tools, programs and processes that promote long‑term sustainability.

Some examples of programs in operation today include training and education in agronomic practices, financial management, traceability and reducing child labour. Creating farmer cooperatives and linking financial institutions such as banks with bespoke products to meet SHF needs are other examples. All are supply chain initiatives that can help uplift and secure the future of the SHF sector globally.

Some examples of programs include Costco’s Sassandra Cocoa Program, HDFC Bank, Marico, International Cocoa Initiative (ICI), and the Global Platform on Sustainable Natural Rubber.

Towards a just and equitable transition: the issue 

The concept of a ‘just and equitable transition’, as articulated in the preamble to the Paris Agreement, is central to the interplay of environmental and social issues in investment. It highlights the importance of transitioning to a low carbon economy in a way that addresses the social impacts on communities, workers and families; and does not overly disadvantage those affected by transitions.

What an integrative approach looks like: renewable energy infrastructure

Achieving a just and equitable transition requires governments, companies, and investors to work closely with affected stakeholders.

One framework that supports successful transition was developed by the Investor Group on Climate Change. It systematically identifies challenges to just and fair transition, offering guidance to help investors explicitly consider these challenges when working through investment decisions.

Cases in point

Igneo Infrastructure Partners (Igneo) has adopted its own Five Minimum Standards, a framework that focuses on health and safety; diversity; climate change; governance; and employee engagement to explicitly addresses transitional challenges. Igneo engages with all its portfolio companies on these standards.

One example is Igneo’s guidance for portfolio companies that procure solar panels, developed in response to identified risks of modern slavery in the industry. This guidance provides context, contains a risk assessment for each company and sets expectations on managing those risks.

CPE Renewable Investment Unit Trust (CPERI), an Igneo portfolio company, has used Igneo’s guidance and is now identified as “low risk” in areas where the guidance has been deployed. It represents a blueprint of success for other organisations to follow.

Global Listed Infrastructure (GLI) is a long‑term investor in Xcel Energy (Xcel), a United States utility company that provides electricity and natural gas services to approximately 3.9 million electric and 2.2 million natural gas customers. Utilities are at the forefront of navigating a just and equitable transition, facing issues such as planning asset lifecycles, asset closures, accounting for potential changes to those timelines and engaging with workers, communities and their representatives.

As it closes coal‑fired power stations and shifts towards renewables, Xcel has worked closely with investors, including GLI. Its efforts to date have been successful – steady, low‑ risk earnings growth with a strong positive outlook to 2030. Its ‘Just Transition Position Statement’ contains overarching principles to support a just transition, acknowledging that the transition will affect employees and local communities in different ways.

The intersection of culture & environment in the mining industry: the issue

The mining industry is critical to the transition to a low carbon economy. At the same time, the industry has a substantial ecological footprint and high potential to disrupt indigenous and local communities and arouse both national and international ire on myriad environmental, social and cultural levels.

What an integrative approach looks like: engaging with First Nations communities

The Global Investor Commission on Mining 2030 is an example of the multi‑stakeholder approach required to both recognise the mining industry’s vital role in society and the transition to a low carbon economy, alongside the need for the industry to manage the systemic risks which can threaten its social license to operate.

Cases in point

Australian Equities Growth (AEQ Growth) pays close attention to the conduct of mining companies in its portfolios. That included monitoring the industry response after Rio Tinto’s tragic destruction of the rock shelters at Juukan Gorge, on the land of the Puutu Kunti Kurrama and Pinikura people in Western Australia in 2020.

Rio Tinto, BHP Group and other Australian listed miners have since committed to deepening relationships and re‑negotiating land‑use agreements with Australia’s First Nations peoples in a raft of new agreements and heritage plans that address concerns about culture, flora, fauna and water.

AEQ Growth has made on‑the‑ground assessments of the quality of miners’ relationships with traditional owners following these commitments. In so doing, the interconnectedness of First Nations cultural heritage protection, climate change, water risk, nature and biodiversity has become clear, as is the fact that land use agreements aren’t just about royalties, but rather reflect a broader relationship and offer flexible ways for miners and First Nations communities to work together.

Discussions about progress with companies in AEQ Growth’s portfolio is ongoing. Positive developments, include Rio Tinto committing to build a Pilbara desalination plant at Robe River, to launch in 2026.

The climate‑nature nexus: the issue

The cascading impacts of climate change and society’s overexploitation of nature are giving rise to the unprecedented devastation of nature and biodiversity. Addressing nature loss and land, water and ocean degradation is crucial to achieving a net zero and climate resilient future.

However, these efforts can sometimes harm nature. For example, converting forests to solar farms causes deforestation, reducing the positive effects of the conversion. Flooding to make dams for hydropower generation can adversely affect land, freshwater ecosystems, plants and animals. Offshore wind farms can have impacts on marine fauna due to high noise, collision with construction vessels and changes to the seafloor.

What an integrative approach looks like: wind farms and air conditioners

Addressing the climate nature nexus requires a highly holistic approach, often requiring the assessment of a very wide list of risks and benefits across a very wide range of investment types and industries. To do so successfully calls for individualised, systematic assessment and action, often in highly specialised contexts.

Cases in point

Igneo Infrastructure Partners holds a stake in Terra‑Gen, one of the largest integrated and independent renewable energy power producers in the United States.

Terra‑Gen has developed Alta Environmental Services (AES), an industry‑leading avian monitoring program that helps wind farms reduce impacts on protected bird populations. When flying close to the turbines, bird‑mounted GPS’s can alert wind farm operators who can, if needed, shut down specific wind turbines. This protects the birds while, where possible, allowing the rest of the wind farm to operate. AES currently monitors over a dozen wind projects for Terra‑Gen and close to three dozen projects in total, representing more than 3,000 MW of power generation and an outstanding record of bird conservation.

The program also records additional information such as the behaviour, distance, height, speed, sex and age of the birds and shares this data with the Fish and Wildlife Service and other researchers to contribute to wider conservation efforts.

FSSA Investment Managers (FSSA) has, since 2016, invested in Midea Group, a major Chinese domestic appliance manufacturer with a market share of around 34% in air conditioners. Air conditioners currently contribute an estimated 7% of annual global greenhouse gas emissions,² with other potential impacts on the environment and human health.³ This number is only expected to rise as the world continues to heat up. FSSA has been engaging strongly with Midea on its decarbonisation plan since 2021.

In 2022, years of development and improvement resulted in Midea producing the world’s first ‘Energy Efficiency Grade 1’ air conditioner.

The company’s commitment to innovation in this regard means it has also been largely unaffected by the various refrigerant bans implemented over the last few decades, having already moved ahead with better alternatives.

Considering all the relevant ESG risks and opportunities associated with an investment decision and in particular how they interplay, is critical to making decisions that more effectively address the multifaceted challenges evident across today’s investment portfolios.

Following this approach can not only lead to better risk management – it can also bring to light more investment and other opportunities that can advantage both investors and communities.

In summary, we believe taking such a holistic approach to responsible investment helps build more resilient portfolios, creates long‑term value and contributes to a more sustainable economy and society.

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¹ Dixon, J., Tanyeri-Abur, A., and Wattenbach, H. (2004), Framework for Analysing Impacts of Globalization on Smallholders

² United Nations Environment Programme (2023). Global Cooling Watch 2023: Keeping it Chill: How to meet cooling demands while cutting emissions.

³ University of Birmingham. (n.d.). Clean Cold and the Global Goals. Birmingham Energy Institute.