ESG: You can’t address the ‘E’ without solving the ‘S’
Updated: Oct 8, 2021
Mitigating the devastating impact of Climate Change has rightly shot up in the global consciousness resulting in ESG becoming increasingly prominent for many investors. However, finding the right actions to keep our world inhabitable isn’t black and white; successfully managing the Environmental impact will require us to address the Social imbalance else we risk losing much of our hard work.
Clean and green energy sources can mitigate the warming of the planet, but scientists stress that the stability of our ecosystem relies on us not breaking through our Planetary Boundaries from Climate Change, Ozone Depletion and Ocean Acidification to more local tipping points for each country, such as converting forest to farmland, freshwater use, biodiversity loss, fertiliser use, chemical pollution, and smog.
our planet's population is expected to grow by 3.2 bn, making it harder not to break through the Planetary Boundaries if we don't change our usage of resource.
With the UN expecting the Earth’s population to reach 11bn by the end of the century, 3.2 bn more than today, we will find it ever harder not to break through the Planetary Boundaries if we don't change our usage of resources.
It is not sufficient to focus on environmental issues alone; we need to address how less developed countries should manage their demographic transition while continuing to prosper. One of the fastest and most effective ways to do so is to reduce poverty, helping people to rise up from the bottom of the pyramid, providing them with security, healthcare, education and better transport. An equally powerful tool to help people and the planet is to empower women, enabling them to spend longer in education and to gain more control over their lives.
a fast and effective way to fight climate change is to reduce poverty, educate people and empower women
Sometimes the steps to achieving the end goal appear counter intuitive to the ESG ratings. In the fight against climate change, for instance, airlines are marked down in many ESG ratings for their carbon pollution. But how do you assess an airline that pollutes but at the same time supports social development? Take Tabatinga, a Brazilian frontier city on the Amazon, at the border with Colombia and Peru. It’s over 1,000 km from Manaus, the state capital of the State of Amazonas. It takes 4 days to sail down the Amazon on the twice-weekly boat trip, and 6 days to come back upstream. Azul, a Brazilian budget airline, introduced a daily flight to Manaus that takes 1 hour 45 minutes.
Azul is the only carrier operating on 80% of its routes and provides connectivity between smaller communities and bigger metropolitan areas, and onwards via hubs to the entire country, facilitating tourism, connecting local businesses with markets for their goods, and broadly encouraging economic activity. This helps to slow down migration to polluted and congested cities, and encourages people to stay close to their families, supporting them in their hometowns. They can care for their local environments, helping remote towns to develop and invest in health and education.
Another example that isn’t black and white is dairy farming. As people become richer, they tend to eat more meat and dairy. Agriculture represents around 19% of our GHG emissions. In agriculture, the main culprit isn’t CO2 but methane, which causes about 28x more warming than CO2, and nitrous oxide, which causes 265x more warming. Globally around 1bn cattle are being raised, producing 2bn tons of CO2 equivalent annually, representing 4% of total emissions. Cows also consume lots of water, and raising cattle is responsible for deforestation of large areas of the Amazon rainforest for pasture and feed crops.
by strengthening the fabric of society everyone can focus on avoiding breaking through the planetary boundaries
On the other hand, dairy farming can have social benefits. Lakshmi is from Gujarat in India. Lakshmi’s husband, a cotton farmer, was struggling with his harvest because of water shortages. So Lakshmi used a microfinance loan to buy two cows which gave her close to 10 litres of milk a day. She sold some, while the rest was kept for the family, improving their protein intake in a country where it’s estimated that 80% of people are protein deficient.
With the money she made selling milk, she was able to keep a daughter in school, to pay for medicine, and to help her daughter-in-law to open a shop in the village. By providing food and healthcare for her family, Lakshmi strengthened gender equality in her family, getting a bigger say in how the household is run.
More importantly, Lakshmi isn’t deforesting to feed her cows; she’s feeding them with sugar cane from her family’s smallholding, and she doesn’t use chemical fertilisers. She sells vegetables to her neighbours, and she says that she stopped using plastic bags a year ago because animals would eat them and get sick when people discarded them.
Azul and Lakshmi would be marked down for burning fossil fuels or methane generation, and their impact on the environment. However, we believe that there is a secondary impact: strengthening the fabric of society to ensure that we can all focus on avoiding breaking through the planetary boundaries.
 Johan Rockström and Mattias Klum (2015) “Big World, Small Planet”, Yale University Press  https://population.un.org/wpp/  https://www.breakthroughenergy.org/our-challenge/the-grand-challenges  Gates, Bill. How to Avoid a Climate Disaster. Allen Lane, 2021, pp 113  Ibid., pp 113  Ibid., pp 117
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of Trinetra Investment Management LLP and are subject to revision over time. Trinetra is authorised and regulated by the Financial Conduct Authority in the United Kingdom.