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The newish, biggish thing in ESG is to invest in companies that aren’t ESG. Making the right sort of noises can be enough, as shown by recent marketing by Blackrock and by last year’s push to relabel Glencore as environmentally friendly, because it’s not causing as much damage as much as it once was.
We’re once again having to consider the limits of Goodhart’s law because an update from the FCA on its Sustainability Disclosure Requirements is expected very shortly. And even before the announcement has gone live, the sellside position shoving has begun.
Berenberg today published a list of UK stocks that might benefit from regulatory approval of ESG “transition” and “enabler” categories. These . . .
… could allow for the inclusion into UK ESG funds of higher carbon footprint stocks that are steadily decarbonising or are providing decarbonisation products. Until now, these types of stocks have been difficult for ESG investors to justify including in their portfolios.
Rather than treat ESG as a “negative, exclusionary-based screening,” managers can buy shares in companies “that have a credible decarbonisation path and are following it,” says Berenberg. Its guess is that the UK will copy the EU’s Sustainable Finance Disclosure Regulation, whose woolly definitions — Article 9 says a fund can wear a green halo if it “has sustainable investment as its objective”, for example — lets in all sorts.
Here’s the broker’s suggestion of all sorts:
Let’s go through those in order.
About three-quarters of DCC’s profit last year was from sales of LPG and fossil fuels. Its other two divisions resell technology and healthcare supplies. The company targets net zero by 2050 but hasn’t set any Scope 3 emissions targets for the short or medium term. Its progress so far in meeting its emissions reduction targets has according to Berenberg been “slightly lagging”, but according to the broker, DCC is both a self-improver and a missionary because it can encourage off-grid fuel customers to cut carbon.
Rotork makes actuators, which do things like open and close valves. Its biggest end market is the oil and gas industry, accounting for about 44 per cent of group revenue. Rotork targets net zero by 2045 but is behind so far in cutting Scope 3 emissions. Berenberg calls Rotork “a controversial ESG top pick” but argues that broader use of actuators in upstream production would be good for reducing methane leaks.
SSE’s biggest division is Thermal, which mostly means gas-fired power stations and gas storage facilities. The Thermal division last year provided 41 per cent of group operating profit; renewables such as onshore wind and hydro were 23 per cent. Its target for net zero is 2050 and so far it’s been hitting or exceeding medium-term reduction targets. In 2021 SSE rejected pressure from Elliott to harvest ESG cash by splitting off renewables.
Coats makes thread. About three-quarters of revenue comes from clothes and footwear makers. The company aims for net zero by 2050 and its Scope 3 performance so far has, according to Berenberg, been “slightly lagging”.
Berkeley and Crest Nicholson, housebuilders on opposite ends of the affordability scale, have net zero targets of 2040 and 2045, respectively. Both have fallen behind already with their Scope 3 intensity targets.
Genuit is a maker of plastic pipes that was previously known as Polypipe. Its net zero target is 2050. Other emissions targets it has provided are being hit or exceeded though they are relatively short-term and somewhat nuanced, such as its aim to cut Scope 3 emissions by 2027 for purchased goods and services by 13 per cent on a 2021 baseline.
Ricardo is a technical consultancy that has historically been associated with the passenger car and motorsport industries. Its biggest segments by revenue last year were energy and defence, which were also its most profitable. It hasn’t yet set a net zero target.
Berenberg’s compliance disclosure notices for all these stocks can be found here.
The overall message is that ESG can mean everything and nothing, so interpretation is what counts:
Without appropriate oversight, we believe transition funds risk easily succumbing to greenwashing. Therefore, active stewardship, engagement, and appropriate controls to decide which companies are truly transitioning will need to play a greater role as transition investing grows.
Because who can we trust on these matters more than fund managers?
Further reading:
— Lord make me ESG, but not yet (FTAV)
— ESG-friendly US equities have been underperforming. Why? (FTAV)
Read the full article here