BP, Shell, Volkswagen, Glencore…we all raise an eyebrow when polluting companies claim to have embraced the green way. Sure, the marketing spiel looks convincing, but the public scandals teach us time and again not to believe it.
Many investors hold such stocks, either directly or through funds. And those of you who want your investments to have a positive impact, to align with your values, may be concerned. Should you ditch your polluting stocks or hang on to them? If the latter, then why?
Time for the usual disclaimer. While we’re not here to tell you what to do with your investments (that’s entirely your business, with the advice of a suitably qualified professional if appropriate), we are here to help you sort the game-changers from the greenwashers.
Most 'brown' companies talk about going green
Some industries are inherently polluting: oil & gas, mining, agriculture, shipping, to name a few. But the attitudes and activities of companies within these industries vary widely. Some are notable for their failure to acknowledge the environmental problems they cause (shipping, for example); others are dedicating serious resources to adjusting their business models and ways of working for a more sustainable future; most are somewhere in between.
This is known as the transition debate (i.e. the transition from polluting to clean industry), and has particular significance for investors. Until recently, if you wanted to engage in green investing, you might focus on low-carbon sectors, such as technology, financial services and renewable energy. While these companies are clearly still important and have their place in a green portfolio, attention has turned to ‘brown companies’, those which are traditionally polluting but are taking steps to become green(er).
Arguably, supporting and financing the transition of brown companies away from polluting activities is as important in combatting climate change (if not more so).
As always, the devil is in the detail.
Sugi shows the impact of your existing investments
There are various things to consider when assessing a company’s impact.
You can check the carbon impact of your existing investments via the Sugi app (for free). Clear, simple data on each investment, compared with an industry average and other similar investments. Branding, policies and good intentions can’t obscure the fact of a company’s emissions and what this means for the environment. You can see for yourself how your investments perform on this basis. And in 2021 we’re bringing out more impact data, so you’ll have an even clearer picture.
Researching new investments, for now, involves a bit of detective work. We could refer you to an investment’s ESG (or sustainability) rating, but that won’t help much. See our earlier blog on this. Your best source is a company impact report or similar information included on the company’s website. A sceptic might question the reliability of such information, since it’s produced internally. So what should you look for?
When it comes to impacting reporting, question everything
1. What is the company actually doing?
First of all, check the company is reporting on issues that are important for its sector, rather than focusing on general corporate responsibility, such as social projects and charity. For example, you would expect to see:
- energy companies switching to renewable energy sources, investing in renewables infrastructure and reducing the environmental footprint of existing operations
- mining companies focusing on the responsible and sustainable extraction and processing of minerals and metals (including those such as lithium, graphite and nickel, which are used in low-carbon technologies)
- agriculture businesses investing in low-carbon transport and sustainable land management
- chemical companies reducing their waste and demonstrating successful waste management practices that protect the environment.
Don’t be swayed by a company’s intentions or policies. Ultimately, it's what a company does in real terms – not what it promises – that matters. And check the numbers. For example, leading oil & gas companies are spending – on average – only 5% of total capex on projects outside core oil and gas supply.* Much more is needed to see a real energy transition.
2. Is the company aligned with the 1.5°C target?
International consensus is now that the global average temperature increase must not exceed 1.5°C above pre-industrial levels to prevent devastating consequences for vulnerable countries.
Increasingly, whether a company’s activities align with the 1.5°C target is a measure of that company’s green credentials. Perhaps this is an artificial construct. After all, it’s hard enough to ascertain whether a country’s activity aligns with the target, let alone an individual company’s. But if a company can demonstrate that its activities are aligned with the target, it’s an encouraging sign.
3. How does a company measure its carbon impact?
Some companies don't release data on their emissions, which could be a red flag. But even when data’s provided, certain emissions may be hidden.
Carbon emissions fall within three ‘scopes’. Scope 1 covers direct emissions from owned or controlled sources. Scope 2 covers indirect emissions from the generation of purchased electricity, heating and cooling consumed by the company. Scope 3 includes all other indirect emissions that occur in a company’s value chain (from suppliers to end users), such as raw material processing, product transportation and consumer use.
Quite often a company omits its Scope 3 emissions from its carbon data, which distorts the picture.** For example, a mining company that was engaged in sustainable extraction and used renewable energy throughout its business would appear to have low carbon emissions based on Scopes 1 and 2. But if that company mined coal, the extracted coal would be prepared using a highly polluting process, shipped around the world and burned by end-users, as coal is designed to be; it would be indirectly responsible for significant Scope 3 carbon emissions. To exclude Scope 3 and describe the company as ‘green’ would be hugely misleading.
In the end…
There’s no clear answer about what to do with polluting stocks. As a retail investor, you can only do your best in very murky waters. But with the current focus on green investing, expect to see many more publicly listed companies trying to woo investors with their green credentials. Let’s hope they make a real difference.
** All carbon data on the Sugi app includes Scope 3 to give you the fullest available picture of an investment’s carbon impact.