Breaking News
Black Friday SALE: Up to 54% off InvestingPro! Register here
Investing Pro 0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Company valuations and climate strategies are poles apart

Stock MarketsNov 25, 2021 06:40AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
© Reuters. FILE PHOTO: General view of the coal power plant in Neurath near Cologne, Germany, November 5, 2021. REUTERS/Wolfgang Rattay/File Photo

(In Nov. 24 story, corrects methodology in paragraph 12)

By Elizabeth Howcroft and Simon Jessop

LONDON (Reuters) -Companies in the most polluting sectors that have invested in climate action often find themselves valued below peers that have been slower to do so, highlighting the difficulty of getting shareholders to back sustainability.

Investors have poured more than $30 trillion https://www.reuters.com/business/sustainable-business/sustainable-investments-account-more-than-third-global-assets-2021-07-18 into environmental, social and corporate governance (ESG) strategies, data from the Global Sustainable Investment Alliance showed.

But the demand for sustainable investment has yet to remove the pressure to put profits first and pro-climate analysts are concerned the outcome of U.N. climate talks https://www.reuters.com/article/climate-un-idCNL1N2S405F earlier this month did too little to help.

Analyses of companies globally by management consultancy Kearney in November seen exclusively by Reuters, as well as data by Credit Suisse (SIX:CSGN) Group AG published in April, found that companies that lowered their emissions in sectors where doing so was expensive and government regulation was limited were valued less, on average, than more emitting peers.

Investors were only found to reward the most emitting companies, such as energy, mining and heavy industry, for taking action on climate change when the cost of doing so was relatively small and government support and regulations were relatively strong.

"Investors want climate leadership, they want tangible transition plans, but at the same time they are only willing to reward companies that can do so without sacrificing returns," Betty Jiang, Credit Suisse's head of U.S. ESG research, said.

Given changing attitudes as climate change becomes more extreme, some see an opportunity to invest in companies cheaply before the market values their climate action more highly.

Others worry the risk of losing value is making corporate boards reluctant to act to avoid catastrophic climate change, especially after governments at the United Nations talks in Glasgow this month failed to send a strong message that global warming can be capped at 1.5 degrees Celsius (2.7 Fahrenheit).

"There is currently no clear line of sight between climate investing and its impacts. Green (investment) portfolios have not yet equated to a green planet," said Anthony Cowell, head of asset management at KPMG Islands Group.

EUROPEAN INVESTORS VALUE SUSTAINABILITY MORE

Kearney calculated the valuation of 481 companies globally as a function of their cash flows.

It then assessed their climate action using the Transition Pathways Initiative benchmark (TPI), an investor initiative launched in 2017 to assess companies' response to climate change.

Where TPI scores were not available, Kearney looked at a ratio of companies' greenhouse gas emissions to their revenue to assign ESG leadership or laggard status.

Steel, chemicals, cement and power companies in Europe with top-rated carbon reduction plans have an average valuation premium of 62% to peers who are climate action laggards, the Kearney analysis found.

In the rest of the world, that premium is 25%, demonstrating that European investors value sustainability more than others globally.

Companies with higher climate scores in the aluminium, airlines, autos, diversified mining, infrastructure, maritime transport and oil and gas sectors show the opposite trend.

In Europe they trade at a 27% discount on average to environmental laggards, the analysis found. In the rest of the world, that discount is even wider - 41%.

Although many factors can skew a company's valuation, Alexis Deladerriere, head of international developed markets equity at Goldman Sachs Group Inc (NYSE:GS), said that in heavy-emitting sectors ESG scores were not reflected in a company's valuation premium.

"There is basically no correlation - no valuation premium - for having a high ESG score in general or having a high 'E' score specifically," Deladerriere said.

"If you are behaving badly, if you are polluting and you're not doing anything about it, do you get penalised for doing that? Unfortunately, not really in the short term."

ENERGY, MINING

The energy and mining sectors are dominated by risks that can impact valuation, but still the evidence is that the very sectors with leading roles in decarbonising are not being rewarded for moving away from fossil fuels.

BP (NYSE:BP) Plc, for example, is viewed as a climate leader with a top "4STAR" TPI level. Yet it has a lower valuation, as measured by its enterprise value to cash flow ratio, than many ESG laggards with lower TPI scores, such as U.S. peer Valero Energy Corp (NYSE:VLO).

In the mining sector, Rio Tinto (NYSE:RIO) Plc is considered a climate leader, with a TPI score of 4, but its valuation premium is less than a third of that of Freeport-McMoRan (NYSE:FCX), which is a climate-laggard by the TPI measure, Kearney's data showed.

BP, Valero and Rio Tinto did not respond to requests for comment. A spokeswoman for Freeport-McMoRan said the company had made "significant progress" on climate in the last two years and is committed to "integrating our climate initiatives into our long-term business plans".

As climate change becomes an even bigger focus for markets and regulators, some corporate directors say boards will start to take stronger action on climate change as more investors begin to give them credit for it.

"Every company wants to figure out how to do (sustainability) quickly and easily because it's a shorter return on investment," said Orlando Ashford (NYSE:AINC), a director on the boards of companies including drug maker Perrigo and solar energy equipment manufacturer Array Technologies.

"If you fold it into the construct of how you are running your business it will take longer, but it’s not a fad," Ashford said.

Company valuations and climate strategies are poles apart
 

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email