By Erica Hall
I first came across the concept of sustainable investing more than 20 years ago. I was in the throes of a career in investment banking, bought into the Wall St “greed is good”, grow profit at all costs mantra. Then sustainable investing popped up and offered a whole different paradigm. What if you could invest for profit and purpose? What if you could generate profits and not cause harm? Sounded like a fairy-tale. Stuff of unicorns and rainbows? Or so I thought. I was wrong.
My moment of clarity was when I heard radiation oncologist Dr Bronwyn King speak at an industry conference. She had uncovered her super fund was invested in tobacco companies. Yet she worked on the lung cancer ward and most of her patients were there due to smoking tobacco. When she realised she was essentially investing in firms that harmed her patients she couldn’t accept it and she did something about it. She pushed for tobacco free portfolios. And she made it happen! Now you would struggle to find a superannuation fund that invests in tobacco.
Sustainable investing has many names such as responsible, ethical, ESG (Environmental Social and governance) and impact. They all tackle investing slightly differently but the one thing they all have in common is the desire to minimise harm whilst generating returns.
In my book, Top stocks ESG, I considered Australia’s top 300 companies based on their market capitalisation and analysed the best companies in each of the 11 sectors within the ASX from an overall ESG risk perspective. The lower the ESG risk the better the companies.
The book’s secondary focus is on companies’ readiness to decarbonise. Net zero emissions aspirations are a global theme – 140 countries have pledged to deliver net zero by 2050, Australia included.
Australia’s federal government has introduced legislation that creates and funds the national Net Zero Authority to help with the management of the transition.
Further, new mandatory finance-related climate reporting laws are working their way through Parliament, and if passed, the standards would put Australia in line with global peers. We know what gets measured, gets done.
This is what I learned when researching my book and assessing companies on their emission risks and opportunities and their credibility in setting pathways to achieve next zero, across emission scopes 1,2 and 3:
- Hard to abate sectors are more proactive on reducing carbon emissions than those in low carbon emission sectors. This is not altogether surprising given those highly emitting companies must take action or run the risk of having stranded assets which could end up worthless.
- Highly rated ESG companies tend to be high quality. Again, the linkage is intuitive because companies dedicating time and resources to understanding their ESG risks and opportunities are likely to be better managed, have higher governance capabilities and therefore better earnings and growth potential
- Carbon offsets have a role to play but cannot be the primary tool. Companies can’t deal with their emissions through offsets alone. They need to make a concerted effort to reduce their emissions if there is going to be any chance of meeting net zero goals. Whilst offsets can assist, they are a supporting player and not the main act.
- There is a high degree of innovation occurring within companies and industries to reduce carbon emissions. The challenge is whether some innovations are commercially viable, and whether they can be implemented at scale.
- Many companies are reporting and managing scope 1 and 2 emissions but scope 3 remains the challenge. For most companies the bulk of emissions are captured in scope 3 yet many companies are only pledging to reduce their scope 1 (direct emissions from own operations) and scope 2 (emissions from own energy use). Scope 3 is indirect and covers a wide array of activities – the use of the companies’ products, or the emissions generated from transporting the product (supply chain). On the one hand it is understandable why Scope 3 commitment is lagging because it is more difficult to account for. However, there are processes that companies can implement such as ensuring there is a supplier code of conduct which might require a net zero transition plan so that suppliers are aligned with companies’ sustainability goals.
- Companies with offshore operations generally seem better prepared for ESG reporting changes. My take is companies operating in other jurisdictions are used to meet higher offshore sustainability reporting standards.
Sustainable investing allows investors to invest aligned to their values and can provide additional insights when making an investment decision.
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