equities esg in equities: identifying winners in the
Post on 03-Dec-2021
6 Views
Preview:
TRANSCRIPT
MARCH 2021 1
ESG in Equities: Identifying Winners in the Energy Transition
Clean energy and anti-pollution initiatives
will continue to impact the equity investment
landscape—but not all companies will be
winners, and careful analysis will be needed to
identify those that stand to benefit and those
that may see a threat to their business model.
BARINGS INSIGHTS
EQUITIES
Marios Halloumis, CFAESG Investment Analyst, Equities
Piers Aldred, CFAInvestment Manager, Global Resources
Paul Morgan, ASIP, CFAInvestment Manager, Global Equities
BARINGS INSIG HT S MARCH 2021 2
The global response to climate change has escalated in recent years, evidenced in part by the
policy steps being taken by governments around the world. Within hours of being sworn in as
the 46th U.S. president, for instance, Joe Biden signed an executive order to reaccept the Paris
Agreement—thereby committing the U.S. to outlining climate actions, known as nationally
determined contributions, and to pursue domestic mitigation measures aimed at achieving the
objectives of such contributions. The European Commission announced the European Green Deal
in December 2019, which aims to transform the region into a low-carbon economy by achieving
carbon neutrality by 2050 and decoupling economic growth from resource use. And in China,
Xi Jinping announced a pledge to make the world’s biggest GHG emitter carbon neutral by 2060.
These commitments have already affected, and will likely continue to influence, the investment
landscape, whether directly or indirectly. Indeed, Article 2 of the Paris Agreement calls for
synchronizing investment flows with efforts to bring about low GHG emissions and climate-
resilient developments. Companies that are directly or indirectly exposed to these trends will
almost certainly be impacted as a result—but not all companies will be winners, and careful
analysis will be needed to identify those that stand to benefit and those that may see a threat to
their business model.
In this first piece of a new series on environmental, social and governance (ESG) in equities, we
explore the potential opportunity created from increased investment in two key policy areas under
the European Green Deal—clean energy and the elimination of pollution.
Clean Energy
Clean, renewable energy has been part of human civilization since ancient times. From Egyptians
using wind power to sail their ships, to Persians using the first-known windmills and wind-powered
water pumps around 500AD, the harvesting of renewable energy has been achieved in a variety
of ways. Encouragingly, creativity in this space has not ceased. For instance, there are startup
technologies, such as bladeless wind “turbines”, that are a fraction of the cost of a traditional wind
turbine and require far less space to install—providing a potential solution for densely populated
areas, such as those in emerging markets. That said, decarbonizing the energy supply is no small
task, especially considering that 84% of today’s total energy supply comes from fossil fuels (FIGURE 1).
SOURCE: BP. As of December 2019.
Nuclear Energy
Renewable Energy
Hydroelectric
Natural Gas
Coal
Oil
4%
5%
6%
24%
27%
33%
FIGURE 1: Global Energy Supply by Source
BARINGS INSIG HT S MARCH 2021 3
As we look across the landscape today, there are a wide array of companies
involved in the transition to clean energy—from equipment manufacturers like
Danish wind turbine manufacturer Vestas, to industrial gas manufacturers like
Linde, which aims to supply clean hydrogen. Even some traditional energy
suppliers are enabling the move to cleaner energy. For instance, Royal Dutch Shell
is using hydrocarbon cash flows to invest in low carbon and energy transition
businesses.
Companies that can materially contribute to the decarbonization of the
environment may experience a tailwind going forward amid the growing push
for a carbon neutral economy. Finnish company Neste, for example, produces a
renewable diesel product that has helped its customers cut GHG emissions by up to
90% over the fuel’s life cycle when compared with fossil diesel.1 More recently, the
company has developed a renewable aviation fuel with significant potential to help
decarbonize aviation. At the same time, Neste is taking material steps to contribute
to the circular economy, in this case through the production of renewable plastics
and use of waste material as renewable feedstock.
Eliminating Pollution
In addition to underscoring the importance of clean energy initiatives, the EU
Green Deal emphasizes the need to better monitor, prevent and rectify pollution
from the air, water and soil. Complementary to this, the Stockholm Resilience
Centre defines “biosphere integrity” as one of four components that are critical
to the functioning of our planet and now to be deemed “high-risk” (FIGURE 2). The
Paris Agreement also stresses the importance of protecting and maintaining these
systems, including oceans.
SOURCE: Steffen et al. As of 2015.
Below Boundary (Safe) In Zone of Uncertainty (Increasing Risk) Beyond Zone of Uncertainty (High Risk)
Climate Change
Novel Entities(Not Yet Quantified)
StratosphericOzone Depletion
Atmospheric Aerosol Loading
(Not Yet Quantified)
Ocean Acidification
BiogeochemicalFlows
FreshwaterUse
Land-SystemChange
BiosphereIntegrity
Nitrogen
E/MSYBII
(Not YetQuantified)
Phosphorus
FIGURE 2: The Planetary Boundaries Framework
1. Source: Neste. As of September 2019.
BARINGS INSIG HT S MARCH 2021 4
As commitments to eliminating pollution and improving
the earth’s atmosphere strengthen, the range of solutions
required to address each specific source of pollution will
likely benefit a variety companies. In particular, companies
that operate in niche/specialist areas that are too small to
attract significant interest from new entrants, or those that
are already well established in a specific field, may benefit
the most. For example, Tomra Systems, which provides waste
collecting solutions, may benefit from government pledges
for capturing single-use plastics, as well as from food retailers
turning positive on the company’s reverse vending machines,
which enable a consumer to exchange their used beverage
bottles in return for cash.
Companies that make products to test water quality or
to monitor pollution in the water or air may also stand to
benefit. Halma is an example—the company has a long
track record of providing health, safety and environmentally
focused products, including some that are used to measure
the shelf life of food to reduce waste and thereby prevent
further pollution. At the same time, the company is taking
steps to improve its own environmental credentials by
reducing its carbon footprint.
Not Forgetting the S and the G
While analyzing companies from an environmental perspective
offers visibility into how their revenue may fare in the face of
evolving climate-focused initiatives, these considerations are
only one factor in determining a company’s attractiveness
from an investment standpoint. Indeed, social and governance
factors are equally paramount. For instance, a company that
creates a product or service that solves one environmental
problem—but does so at the expense of social, governance
or even other environmental factors—may ultimately face
significant challenges. And importantly, not all companies
involved in the sustainability space will have sustainable
business practices, which is why it is important for investors to
conduct the necessary due diligence. In our view, companies
with the following attributes look particularly well-positioned:
• strong franchises: for example, companies that
manufacture products that contribute to a cleaner
environment, while also taking steps to reduce their own
carbon footprint
• good management: alignment with the long-term
interests of minority shareholders
• sustainable business practices: no hidden E, S and G
risks—including environmental fines or lawsuits related to
business ethics—that pose a threat to financial stability
One of the better-known examples of environmental factors
conflicting with social or other considerations relates to
the use of palm oil in manufacturing. Very widely used
in everything from food production to renewable fuel
feedstock, palm oil has generated an abundance of negative
headlines for its ties to issues like air pollution, deforestation
and human trafficking. There are widespread and varying
efforts underway to combat these issues. Again, Neste is an
example—the company set up their own, EU Commission
approved, sustainability verification system for palm oil in 2014
and are using sustainably-produced, 100% certified and 100%
traceable palm oil as part of their renewable feedstock. The
company has even committed to eliminating this sustainable
palm oil altogether by 2024, while at the same time taking
active steps to improve the fair treatment of workers in the
palm oil industry. In our view, this is the type of progress and
forward momentum that can ultimately help improve the
discount rate required by investors and further unlock value.
“Companies that can materially contribute to the decarbonization of the environment may experience a tailwind going forward amid the
growing push for a carbon neutral economy. ”
BARINGS INSIG HT S MARCH 2021 5
From a governance standpoint, factors such as the structure,
diversity and independence of a company’s board can be significant
determining factors in a company’s overall attractiveness. In the
case of Neste, the board is 100% independent, with a roughly 40%
female representation, and the roles of the CEO and chairman are
split.2 Companies like Halma, too, look sound from a governance
perspective. While the company operates many subsidiaries,
corporate governance appears to be strong. Female representation
on the board has also remained at 40% over the past five years, but
the ratio has notably improved at the executive board level from 13%
to 45%.3 And finally, the company has a group-wide whistleblowing
policy that applies not only to its employees, but also to its joint
venture partners, suppliers, customers and distributors.
Key Takeaway
Clean energy initiatives and policies—like the EU Green Deal—will
impact the equity investment landscape for years to come. In the
face of growing regulation, some companies look better positioned
than others. In particular, those that are tackling or addressing
pertinent climate issues head-on, while doing so with sustainable
business practices, look likely to benefit, and could potentially
command a higher premium in the market going forward versus
peers with less favorable ESG dynamics.
At Barings, ESG analysis plays an integral role in our understanding
of the potential risks and opportunities that a company faces, and in
our investment decision-making. Our approach to ESG is anchored
by three principles:
• integrating ESG factors into fundamental, bottom-up investment
analysis
• taking a dynamic and forward-looking approach to analyzing a
company’s ESG factors
• actively engaging with management teams to improve ESG practices
We believe in engaging directly with corporate management teams to
drive better ESG practices and improved disclosure, rather than relying
on exclusion lists—which may fail to recognize the role certain, usually
carbon-intensive industries play in achieving a sustainable future. In
allowing us to quantify ESG risks and giving us a more comprehensive
view of a company’s future, this approach puts us in a position to
deliver potentially superior risk-adjusted returns over time—as we
seek to create a better outcome for people and the planet.
2. Source: Neste. As of February 2021.3. Source: Halma. As of December 2020.
IMPORTANT INFORMATION
Any forecasts in this document are based upon Barings opinion of the market at the date of preparation and are
subject to change without notice, dependent upon many factors. Any prediction, projection or forecast is not
necessarily indicative of the future or likely performance. Investment involves risk. The value of any investments
and any income generated may go down as well as up and is not guaranteed by Barings or any other person.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. Any investment results, portfolio
compositions and or examples set forth in this document are provided for illustrative purposes only and are not
indicative of any future investment results, future portfolio composition or investments. The composition, size of,
and risks associated with an investment may differ substantially from any examples set forth in this document. No
representation is made that an investment will be profitable or will not incur losses. Where appropriate, changes
in the currency exchange rates may affect the value of investments. Prospective investors should read the offering
documents, if applicable, for the details and specific risk factors of any Fund/Strategy discussed in this document.
Barings is the brand name for the worldwide asset management and associated businesses of Barings LLC and its
global affiliates. Barings Securities LLC, Barings (U.K.) Limited, Barings Global Advisers Limited, Barings Australia Pty
Ltd, Barings Japan Limited, Baring Asset Management Limited, Baring International Investment Limited, Baring Fund
Managers Limited, Baring International Fund Managers (Ireland) Limited, Baring Asset Management (Asia) Limited,
Baring SICE (Taiwan) Limited, Baring Asset Management Switzerland Sarl, and Baring Asset Management Korea
Limited each are affiliated financial service companies owned by Barings LLC (each, individually, an “Affiliate”).
NO OFFER: The document is for informational purposes only and is not an offer or solicitation for the purchase
or sale of any financial instrument or service in any jurisdiction. The material herein was prepared without any
consideration of the investment objectives, financial situation or particular needs of anyone who may receive it.
This document is not, and must not be treated as, investment advice, an investment recommendation, investment
research, or a recommendation about the suitability or appropriateness of any security, commodity, investment, or
particular investment strategy, and must not be construed as a projection or prediction.
Unless otherwise mentioned, the views contained in this document are those of Barings. These views are made
in good faith in relation to the facts known at the time of preparation and are subject to change without notice.
Individual portfolio management teams may hold different views than the views expressed herein and may make
different investment decisions for different clients. Parts of this document may be based on information received
from sources we believe to be reliable. Although every effort is taken to ensure that the information contained in
this document is accurate, Barings makes no representation or warranty, express or implied, regarding the accuracy,
completeness or adequacy of the information.
Any service, security, investment or product outlined in this document may not be suitable for a prospective
investor or available in their jurisdiction.
Copyright and Trademark
Copyright © 2021 Barings. Information in this document may be used for your own personal use, but may not be
altered, reproduced or distributed without Barings’ consent.
The BARINGS name and logo design are trademarks of Barings and are registered in U.S. Patent and Trademark
Office and in other countries around the world. All rights are reserved.
*As of December 31, 2020
21-1567870
LEARN MORE AT BARINGS.COM
Barings is a $345 billion* global investment manager sourcing differentiated opportunities and building
long-term portfolios across public and private fixed income, real estate and specialist equity markets. With investment
professionals based in North America, Europe and Asia Pacific, the firm, a subsidiary of MassMutual, aims to serve
its clients, communities and employees, and is committed to sustainable practices and responsible investment.
top related