ESG changed my mind on…the buy-in around climate change

abrdn's David Smith discusses inefficiencies in ESG, house renovations and the battle for 1.5C.

In this summer series for ESG Clarity, members of the sustainable investment industry tell us how their thinking on this fast-moving industry has adapted over the years and what changes that has led to.

Here, David Smith, senior investment director, Asian equities, and co-manager of the Asian SDG equity strategy at abrdn, discusses inefficiencies in ESG, house renovations and the battle for 1.5C.

What has ESG or sustainable investing changed your mind about over the past couple of years?

Perhaps a more controversial answer, but in recent years I’ve found myself increasingly questioning the buy-in around climate change specifically, and perhaps ESG more broadly.

Take climate change – the facts are quite clear, we’ve known about it for some time (arguably since 1896), the effects are being increasingly felt globally (extreme weather just in the past six months), the technology to mitigate is in many cases increasingly mature (both technologically and economically), and yet the topic remains perplexingly divisive.

Nonetheless, I remain optimistic, not least because I can see the progress being made by some innovative companies that remain committed to driving change. As a collective – and by that I mean all of us – consumers, companies and governments can and should urgently push for more progress.

On ESG more broadly, it shouldn’t be controversial that companies that adequately manage issues like supply chains, labour relations, environmental impact, and so on, are likely to be better managed.

But this has become a very polarising term (and one I wish we didn’t use anymore as an industry), and with that a lot of momentum has been lost. Perversely, as an investor, that provides us with opportunities. The market seems not to be pricing ESG appropriately, for a variety of reason related to philosophy, process, timeframe, and/or resources, and so as an active manager there’s a whole spectrum of important data available that isn’t really being incorporated into pricing as efficiently as it could (and should) be. The market is far from efficient when it comes to ESG.

Describe one thing about ESG or sustainable investing you’ve heard recently that has stuck with you or been particularly poignant.

In ESG you tend to hear remarkable facts and read remarkable research all the time. I was recently reminded that fashion is now the world’s second higher emitter of carbon, for example, accounting for around 10% of global emissions. Or the incredible carbon footprint of an email (one more reason to just walk over to a colleague rather than send an email!). Or, reflecting some work we’ve been doing on energy transition, the fact that sulfur hexafluoride (SF6), used in electric insulation, is 23,500 times more effective at trapping radiation than an equivalent amount of carbon dioxide.

But probably the most poignant thing I’ve heard was Antonio Guterres, secretary-general of the UN, who earlier this year said “the battle to keep the 1.5C limit alive will be won or lost in this decade”. This should really bring it home to everyone – there’s not long left to do what needs to be done.

What changes have you made personally this year to become more sustainable?

This is a bit of a big year for my family, given we’re renovating our house. My son and I have gone down the rabbit hole on renewable energy and energy efficiency (hours of fun on YouTube) and so we’re trying to make the house as energy efficient, and ‘off-grid’ as possible. The aim is to be a net seller of electricity, though perhaps come back in a year and see how that’s going! We’ve also bought an electric vehicle. We should be taking public transport as much as we can, and generally do (Singapore has a really excellent – and great value – public transport system), but for trips that we need to make by car, we’ve gone electric.