WHEN global asset manager Fidelity International rates the environmental, social and governance (ESG) credentials of companies, obvious climate-related metrics like greenhouse gas emissions are not the only factors in play.

There are also “just transition” considerations in the picture when it weighs its investment decisions and engagement with these companies. Just transition metrics include these companies’ approach towards employee management, how they manage the impact of their operations on the community, as well as their contributions to keeping basic goods like electricity affordable, said executives of Fidelity International at a virtual media conference on Tuesday (Sep 12).

Just transition refers to the efforts taken to ensure that the economy’s journey to being low-carbon are fair and inclusive in nature, especially for workers and communities hit by the changes.

Citing Fidelity International’s engagements with thermal coal-related companies as an example, Emilie Goodall, head of stewardship for the asset manager in Europe, said that some just transition considerations include a coal plant owner’s commitment to a timeline to phase out coal, the public-policy environment in which the coal plant operates, its plans to minimise redundancies and the available jobs in renewable energy for workers to transfer to.

Fidelity International has committed to phase out thermal coal from its portfolio by 2030 for countries in the Organisation for Economic Cooperation and Development, and by 2040 for the rest of the world.

Goodall said: “This is really a considered exercise in stakeholder management, and communities have to be consulted and involved... So the emerging best practice on just transition policies suggests that developing long-term plans on the basis of stakeholder engagement is really a critical first step.

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“And this really should lead to a suite of measures that combines direct support for workers, measures to foster local cohesion and identity, and measures to stimulate local economic growth and diversification.”

Flora Wang, head of stewardship in Asia at Fidelity International, said that, in discussions with a state-owned South-east Asian utility company that she did not name, the initial focus was on getting the asset owner to move the plant’s power mix to one with a higher renewable-energy component. But the talks soon evolved to include ensuring that there were alternative sources of energy that were as reliable and affordable, even as work was done to retire the coal plant.

Wang said: “Often, a lot of these coal-fired generation plants are the main driver of the local economy as well as of employment... The engagement with the company definitely evolved as we moved along. I think one indication of the increasing sophistication of the conversation was the recognition of the socio-economic challenges.”

She added that investors need to acknowledge the complexity of a just transition, in order to have a constructive, meaningful dialogue with their investee companies.

In addition to engaging with its investee companies regularly, Fidelity International could also support climate-related shareholder proposals, file proposals or even vote against company directors. Most investment firms have “escalation mechanisms” to nudge their investee companies into taking certain actions, with divestment being the strongest tool at their disposal.

Goodall noted, however, that divestment is unlikely to change companies’ behaviour.

Ultimately, just transition is a required ingredient in decarbonising the world’s economy, said Tan Jenn-Hui, chief sustainability officer of Fidelity International.

“If you simply pursue net-zero as an exercise in reducing carbon emissions, without regard to how that might impact different communities, different countries, different employees, different industries, you will lose the popular support for that transition. And therefore, you will lose the underpinning that we need, which is policy and regulatory environment that enables net-zero to happen,” he said.