The Importance of the ‘E’ in ESG

By | 2018-01-12T09:17:21+00:00 August 12th, 2015|Conservation, ESG, Finance, In-Depth|0 Comments

This article was originally posted on Pension Funds Online on 7th August 2015.

Aurum’s Adam Sweidan calls for the investment industry to help preserve the environment.

The investment industry manages money; pensions for our future and wealth for future generations.

But what future are we saving for if we do not preserve the environment?

We live in an era where people believe that most problems can be solved with money and technology.

Take quantitative easing; if there is not enough money in the system, we print some more. But when it comes to natural habitats, ecosystems and species, once these are destroyed, they are impossible to replace.

I believe Environmental, Social and Governance (ESG) should be high on investors’ agendas, but how it is defined and applied is still in its infancy, especially when it comes to hedge fund investing.

That said, for the last two decades, long before the advent of ESG, Aurum has strived to manage both money and our business holistically with a strong social and governance ethos.

However, when it came to balancing our environmental footprint we hit a problem after uncovering shortcomings with traditional carbon offsetting schemes.

Firstly, the cheaper the credit, often the worse the quality of the offsetting scheme, and moreover, the cheaper the credit, the more a company can offset, often resulting in the company being less incentivised to cut its emissions.

Secondly, there is often a lack of rigorous assessment, as well as an assumption that trees planted are left in the ground until their death to ‘lock in’ carbon; maintaining young trees is expensive and many are often neglected once the credits have been sold.

We had a goal to have a net positive impact on the environment and found that traditional offsetting schemes couldn’t help us to achieve this.

Determined to find a solution, we worked with Synchronicity Earth, a UK charity founded in 2009, which takes a multi-adviser approach to environmental conservation and selects NGOs in the areas of freshwater, forests, oceans and species.

Together we created a new portfolio, called Regeneration that focuses on restoring degraded forests, mangroves, wetlands and coral reefs so they not only absorb carbon but also benefit the surrounding ecosystem and communities.

Aurum’s first initiative is with Hutan, an NGO established in 1998 to restore degraded and fragmented forest patches in Malaysian Borneo, an area that has already lost 80% of its natural forest to palm oil plantations.

With 50 local staff, Hutan has been rehabilitating wildlife habitat and forest corridors since 2003 by planting native, fast-growing tree species.

This has a positive environmental impact and, because the work is led by local women who were previously excluded from employment, the project has a social impact too. The women engage with the communities, ensuring the long-term success of the restoration work.

The Regeneration portfolio is scalable and open to all like minded companies and investment managers. While many investment managers have solid governance structures and are engaged in social philanthropy, there are very few that have a really effective solution for the “E” in ESG.

I believe that if mobilised the industry can have a significant positive impact on environmental concerns and I encourage others to join us in our approach. As well as preserving their capital, we should be aiming for a net positive impact to help preserve the environment and species for future generations.

Adam Sweidan, CIO of Aurum Research Limited and Founding Trustee of Synchronicity Earth.