In an article titled India and the ESG challenge, (ESG indicating Environment, Social, Governance) NAVNEET MUNOT wrote about climate change. He reminded the reader that the year 2019 was among the hottest years ever recorded, and July 2019 was the hottest month in the 140 years that temperature records have been kept.
There were forest fires, floods, droughts, and other worrisome signs, from melting glaciers to collapsing ice sheets, that demonstrate the planet’s climatic conditions have worsened considerably over the last few years.
Nine of the 10 most-polluted cities in the world are Indian. We are also among the top three nations when it comes to air pollution–related deaths. But the air quality is only one aspect of our climate change dilemma. Even if we solved our air pollution problem tomorrow, cities like Mumbai and Chennai would still be at risk from rising sea levels.
What does that have to do with investing? The answer: A lot.
Historically, companies have focused on financial performance and corporate governance to mitigate risk and assess the potential for long-term value creation. They now realise that they owe a fiduciary duty to the community at large. Social and environmental concerns are at least as important as financial performance and governance. And the twin fiduciary duties are best served not by maximizing short-term profitability but by concentrating on returns and risks over the long term.
JON HALE, head of sustainability research for Morningstar, shows how some companies are making a difference by managing carbon risk more effectively by reducing the reliance of their products and services on fossil fuels. He uses research done by Sustainalytics, an independent global provider of ESG and corporate governance research and ratings to investors.
Siemens
This German industrial conglomerate and its diversified business lines range from healthcare to factory equipment to power generation, including wind. Siemens’ carbon-risk exposure comes from its products and services – carbon-emitting motors, for example. But it earns excellent management scores for the technologies it offers that are advancing a low-carbon economy. These include operating power grids for renewable energy power plants and providing offshore wind turbines, including deep-sea solutions. Siemens also builds power equipment that helps companies improve energy efficiency. Examples include turbo machinery, such as high-performance, low- emission gas turbines. Siemens is also working with Airbus to power large airplanes on electricity by 2020. The company has targeted carbon neutrality in its operations by 2030, the first global industrial player to set such a target.
Alcoa
This aluminium company is based in the United States. Though Alcoa is a carbon intensive business, it has a strong greenhouse gas reduction programme in place. From a 2015 baseline, the company is targeting emissions reduction of 15% by 2025 and 20% by 2030. Alcoa’s presence in Iceland provides it with reliable access to renewable geothermal energy. In late 2016, Alcoa launched a sustainable product line called Sustana, which uses recycled aluminium and releases 75%–90% less carbon than the industry average.
Total
One of the world’s largest integrated oil and gas companies, Total faces high risk according to Sustainalytics’ assessment, but it avoids the Severe risk rating carried by sub-industry peers ExxonMobil, PetroChina, Rosneft, or Occidental. Total faces significant exposure to carbon regulations and climate change-driven market shifts. The fact that half of Total’s reserves are in lower-carbon natural gas lowers its exposure to carbon risk, as does its decision to shelve some of its oil sands assets due to rising costs. Total discloses GHG targets and strives for energy efficiency, boosting its Management Score.
Auto makers
Although Peugeot and Fiat Chrysler are mainstream auto makers, Sustainalytics assesses the former as Medium risk and the latter as High risk. Peugeot is less carbon-intensive than Fiat Chrysler in both its operations and its products and services. It is also doing a far better job of managing its carbon-risk exposure.
Electric utilities is a sub-industry facing even more carbon risk than automobiles. Red Electrica, which owns and operates the Spanish electric transmission system, faces Low carbon risk. By contrast, Kyushu Electric Power, a Japanese utility serving the country’s southwest region, earns a High Risk rating. According to Sustainalytics, Red Electrica has incorporated renewables into its energy mix. The company has launched a greenhouse gas (GHG) reduction program, and the carbon intensity of its business is trending downward. Meanwhile, Kyushu Electric Power is heavily dependent on coal, and has a weak GHG-reduction program in place, according to Sustainalytics.
Long-term sustainable growth requires a sustainable business and a sustainable environment. Adopting this logic creates a virtuous cycle: As investors focus on ESG, companies respond by integrating such considerations into their business practices.
