The Ethical Investor: How a fundie deals with big ESG claims, and three stocks that walk the talk

A study by the New Climate Institute reveals that top global companies are making ESG claims that are not backed by action
Only one company in the list is evaluated as having “reasonable integrity”
Stockhead speaks with Regnan portfolio manager, Mohsin Ahmad, to discuss the issue

A new study by German-based New Climate Institute (NCI) reveals that 25 of the world’s largest companies in reality only commit to reduce their emissions by 40% on average, not 100% as suggested by their “net zero” claims.

Only one company’s net zero pledge was evaluated as having “reasonable integrity”; three with “moderate”, 10 with “low” and the remaining 12 were rated as having “very low” integrity.

The study concluded that headline climate pledges require detailed evaluation, and in the majority of cases cannot be taken at face value.

“We set out to uncover as many replicable good practices as possible, but we were frankly surprised and disappointed at the overall integrity of the companies’ claims,” said Thomas Day of New Climate Institute, lead author of the study.

“As pressure on companies to act on climate change rises, their ambitious-sounding headline claims all too often lack real substance.

“This can mislead both consumers and the regulators that are core to guiding their strategic direction. Even companies that are doing relatively well exaggerate their actions.”

Using an approach that uses offsets is also undermining integrity, says the report.

For example, 24 of 25 companies will likely rely on carbon credit offsets, instead of reducing their own carbon footprints – a practice which can easily be reversed by, for example, a forest fire.

How the global companies stack up

Here’s the result of the study, showing where each of the 25 companies stacks up.

Source: New Climate Institute

“A new mindset and evaluation standard for companies is necessary,” the report said.

“While in the Kyoto era only some countries were required to act, companies now need to ask themselves: ‘Would we reach global net zero emissions if all would do what we are doing?’”

Legislation needed to weed out greenwashing

Greenwashing is indeed a key challenge for ESG investors.

“But where addressed, it has the potential to unlock greater global climate change mitigation ambition,” says the NIC report.

So far, consumers and shareholder’s expectations have become the main driver in holding companies to account with their net zero pledges.

But the onus will eventually have to be on regulators to find ways to distinguish and segregate climate leadership from greenwashing, the report says.

This will allow funds to go to the right companies, allowing ambitious ones to innovate and accelerate decarbonisation.

Interview with Mohsin Ahmad of Regnan Global Equity Impact Solutions

Stockhead reached out to Mohsin Ahmad, a portfolio manager of Regnan Global Equity Impact Solutions who was visiting Australia from the UK.

Regnan is an investment pioneer with a long track record of providing advice and insights on ESG issues. Regnan’s Global Equity Impact Solution Fund is distributed in Australia by Pendal.

What are your thoughts on misleading ESG claims made by companies?

“There are lots of companies that are making big claims, for example they claim to be addressing all the UN SDGs (Sustainable Development Goals),” Ahmad told Stockhead.

“But for us, those claims that companies make are irrelevant because our process is to interrogate that and to understand whether they’re genuine or not.

“So what we do is look at the products the company is producing, and understand whether those products tie to any of the SDG targets.

“Then we also make a distinction between ESG and impact, because ESG is primarily about the operational footprint and risk management of a company.

“For example, if a company is to trying to save water or make their work environment better for employees, that’s ESG and it’s really focusing on the operations.

“ESG is important, but it’s not enough as an impact fund.

“For an impact fund, you really need to look at the products and services the company is producing, and get to the root of the sustainability problems.

“In other words, you need to be investing in the solutions, because ultimately, only then are we going to solve these problems.”

How can investors tell if a fund is a true impact fund then?

“The best way to tell if a fund is doing something that has true impact is to look at their holdings,” Ahmad said.

“So if it looks like a generic global fund with the same old names that you expect, then it probably is.

“For us, the key difference is that true impact investing involves a 100% portfolio construction that’s tied to mission driven companies that are delivering solutions, which are tied to the UN SDGs.

“That means you won’t see Google, TSMC, ASML or Unilever in our portfolio.

“All of our holdings need to have a high level of intentionality, with a meaningful percentage of revenue that are coming from the solution that’s delivering the impact.”

How do you identify those companies?

“The UN SDGs are very attractive, shiny logos,” Ahmad said.

“But in the end, if you want to do this properly, you have to go down to the underlying SDG targets and there are 169 of those.

“So what we did was to develop and build our own taxonomy.

“We went through each of those SDG targets, and we understood the problem each target is trying to address.

“And for us, it’s not just about the companies that we own, but it’s also about the engagements that we are carrying out with each of our holdings.

“We have an active engagement program with each of them, with clearly defined milestones.”

Tell us about your top stock picks in the Regnan portfolio

Hoffmann Green Cement Technologies

“Cement accounts for 8% of global greenhouse gas emissions,” said Ahmad.

“Many of the incumbent players in the cement space are focusing on technologies like carbon capture usage and storage.

“But the problem with that is, it’s expensive and unproven on a commercial scale, and it doesn’t deal with the root of the problem.

“The research even suggests that they end up generating and emitting more carbon than they actually capture.

“Hoffman Green Cement is a company that’s genuinely providing a solution here.

“They have developed one of the few scalable low carbon solutions to produce cement, and they do that by eliminating the most carbon intensive stage in the process, which is the clinker.

“They’ve developed a clinker-free process that reduces emissions by 80% compared to Portland cement, and their cement is of superior technical performance.”

Alfen

“Alfen is a company which is focused 100% on the energy transition. It’s based in the Netherlands, and they’ve been around for almost a century,” explained Ahmad.

“In the past decade, they’ve moved into battery charging and energy storage.

“And they have a market leading position now in EV (electric vehicle) charging within their home market.

“Alfen is really at an inflection point in Europe in terms of EV penetration and adoption.

“And for EVs, what we need right now is the infrastructure, and Alfen is helping to to meet that need.

“In Q1 this year, they’ve they’ve tripled the size of their charging business, so it’s a very well positioned and profitable company.”

Tomra

“Tomra is a company which many of you might be familiar with in Australia, through their reverse vending machines,” said Ahmad.

“What Tomra does is provide an incentive for consumers to return plastic bottles into the machines, which in return, they will get money.

“Tomra has a market leading position here, with around 80% market share in the reverse vending machine market.

“But what they’ve also been doing is sorting different types of waste, making it much easier to recycle products.

“And also, they’ve got the technology to sort plastic flakes to a 99% plus level of purity.

“There’s a huge demand there from the beverage companies and from consumers that recognise that single use plastic is just not sustainable.”

The views, information, or opinions expressed in the interview in this article are solely those of the interviewee and do not represent the views of Stockhead.

Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.