By Andrew Poreda, Vice President and Senior Research Analyst
A biweekly roundup of Sage’s top ESG news picks
What it means: 2021 was a great year for sustainable companies. The Morningstar U.S. Sustainability Leaders Index, which is fueled by ESG scores from Sustainalytics, showcased a 33% return, beating the broader U.S. market by 8%. This outperformance occurred even though many of the top performers in the market were oil and gas companies, which are usually absent from ESG or sustainable leaders lists.
Sage’s View: Many investors try to simplify the ESG discussion by surmising on performance with broad strokes, but investors really need to discern how a fund measures ESG and constructs portfolios. All ESG funds are not just tech-heavy growth funds absent of energy, so investors really need to do their homework and look under the hood. An outperformance from the energy sector does not doom ESG, especially considering that the sector is so small from a market capitalization perspective (e.g., it is only 3% of the S&P 500).
What it means: Exxon officially announced intentions to reach Net Zero in its operations by 2050, as outlined in the company’s Advancing Climate Solutions 2022 Progress Report. The goal included only Scope 1 and 2 emissions but left out Scope 3. As many critics pointed out, Scope 3 emissions (primarily from product utilization) represent over 90% of the emissions in the oil and gas industry, so this Net Zero goal is not necessarily moving the needle very much and simply passes responsibility onto the consumer.
Sage’s View: Stakeholders have been pushing hard for companies to create Net Zero commitments, but any commitment without Scope 3 included is likely to be a hollow marketing ploy that most investors will easily see through. On the other side, everyone should be excited about any environmental improvements that a company can make, because even incremental changes can have impact. The oil and gas industry could be more impactful through innovation and scaling emerging technologies, such as carbon capture, sustainable fuels, and green hydrogen.
What it means: If wind and solar are going to supplant fossil fuels and become our dominant energy providers, energy storage is going to be essential. While battery storage may be able to account for some of the daily, short-term variability in energy output of these renewables, long-term output challenges are a bigger problem. Could we potentially lean on a proven source of energy technology with a modern-day twist? Pumped hydro energy storage is a process where water is pumped uphill to a higher elevation, and then when the water is needed it is pumped downhill for electricity generation purposes. This process faces scrutiny because historically these systems have negatively impacted our rivers; however, a new closed-loop system would instead pump water between two reservoirs, taking the river out the equation. In Australia, two projects under construction will provide more energy storage than all the utility batteries in the world combined.
Sage’s View: Long-term energy storage is one of the missing links to fully achieving a more renewable energy future, so efforts to create viable solutions are essential. Seasonal variability of wind and solar output (e.g., Germany’s challenges) is going to mean we need either continued fossil fuel back-up (redundancy can be expensive and limit environmental gains) or have copious amounts of energy available in reserve. Other avenues for energy storage, like green hydrogen, are also going to have to be in the mix, unless we want to talk about continuous power options like nuclear.
What it means: In his annual letter to company CEOs, Larry Fink, Blackrock’s CEO (and manager of over $10 trillion in assets), focused on stakeholder capitalism and how everyone needs to approach the fight on climate change. His big plea was that climate action is not a ‘woke’ agenda, but a mutual beneficial path for all stakeholders. Overall, he made a solid case that ESG is here to stay, and sustainable investing will only grow more important.
Sage View: With how intertwined our society is, the case that shareholder capitalism will become stakeholder capitalism (if we aren’t already there) is very strong. And if the largest asset manager in the world is speaking to the importance of some of these ESG issues, everyone should be listening. Unfortunately, Blackrock is taking hits from all different angles after this release. Some are arguing this message is just a bunch of empty words with little action to follow, and others are claiming that Blackrock is being ‘woke” and pushing a particular political agenda. Blackrock has placed a large emphasis on ESG initiatives over the past few years, so we expect that momentum to continue.
What it means: In a world where ESG investing continues to grow in popularity, values matter. Or do they? Golden State Warriors co-owner Chamath Palihapitiya caused a global firestorm when he insinuated that he had no interest in the genocide and human rights abuses of the Uyghurs in the Xinjiang region of China. Although he took a wrath of criticism, his lack of concern mirrors much of Corporate America, including the financial services industry, where leaders are largely silent. As millennial and Gen Z investors continue to gain influence as investors, asset managers are going to have to effectively address issues like this one.
Sage’s View: Most of Corporate America has clearly avoided addressing major concerns with China in order to stay in the good graces of the Chinese Communist Party and the Chinese people. One rogue tweet of criticism can cost hundreds of millions of dollars for an organization, as the NBA found out the hard way. Now that Congress is taking action to address areas like human rights abuses in China (one of the few areas where we see almost universal bipartisan support), it is going to be hard for Corporate America and asset managers to avoid the topic for much longer. The American public does have an unfavorable view of China and wants to promote issues such as human rights (as indicated by 2021 Gallop and Pew Polls). So we expect to see more criticism across the board on all things China, especially as the Winter Olympics starts up in a few weeks. Hopefully, at a minimum, a meaningful dialogue from companies will follow.
For more news, information, and strategy, visit the ESG Channel.