Increased climate risk awareness, some standardisation in the rating of environmental metrics, and the large inflows of capital into environmentally sustainable investments have thrust environmental concerns to the forefront of listed companies and shareholder agendas, says Old Mutual Wealth Private Client Securities Senior Research Analyst Victor Mupunga.
While for many years the environmental measurement in Environmental, Social, and Governance (ESG) investing took a back seat to issues such as governance, which many felt had a more material impact on the performance of a business, this is no longer the case, says Mupunga. Despite the growing trend of companies disposing of their carbon-intensive assets, he says that a number are choosing to reduce their carbon-intensive exposure while simultaneously growing exposure to environmentally sustainable investments.
“This holistic approach to environmental impact and renewable energy investments is a responsible means to achieve a sustainable energy mix,” says Mupunga. He says Berkshire is a company that holds this philosophy, with its energy division holding onto coal power plants and its railway operations transporting coal for electricity generation and industrial use, while simultaneously investing in large-scale renewable energy generation.
“Earlier this year, Warren Buffett pointed out that BHE - the energy business - is a rarity among Berkshire’s subsidiaries, and utilities in general, in that it does not pay any dividends to the holding company. This is a direct result of the significant amount of capital that is required to transform the US electrical grid, which in turn informs BHE’s investment plans over the coming decades,” says Mupunga.
“Given the long payback periods and the absence of dividends, there is a need for large and transformative renewable projects to be backed by companies with solid balance sheets. This gives credence to Berkshire’s approach of gradually shifting to renewable energy sources over time, rather than immediately shunning cash generative non-renewable sources and ‘going along with unrealistic visionaries desiring an instantly new world’ as Buffett recently put it,” says Mupunga.
Berkshire is not alone in the strategy of a gradual transition towards renewables and sustainable business models aimed at reducing carbon footprint. Mupunga says Honeywell International is another that has embraced such a measured move.
“The group’s Performance Materials and Technologies segment, which contributed around 30% of group profit pre-COVID, has oil and gas customers,” says Mupunga, who says that despite this exposure, it also has made notable advances in reducing its carbon footprint.
“While retaining exposure to high carbon-emitting industries, Honeywell has developed a range of solutions that its clients across various industries can use to monitor and reduce their carbon footprint,” says Mupunga.
In a sure sign that no industry will avoid climate accountability, Mupunga says a little-known ESG activist investor named Engine No1 attracted global attention when it won a fierce proxy voting battle and saw three of its nominees being elected onto ExxonMobil’s 12-member board of directors.
“Given that ExxonMobil is the largest carbon emitter among the oil majors, with its directors having long been regarded as doing too little to reduce emissions, Engine No1’s triumph was seen by some as an indication that no industry is immune from the pressure to green up its act,” says Mupunga.
He says it is prudent for investors to encourage and drive positive change. While companies that take a measured approach may not immediately provide large exposure to the renewable energy sector, they are making notable strides by investing in the sector. “This holistic strategy means investors can get good returns while gradually achieving a greater energy mix in their portfolios,” says Mupunga.
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