Analysis-company valuation and climate strategy are very different Reuters

© Reuters. File photo: Panorama of the Neurath coal-fired power plant near Cologne, Germany on November 5, 2021. REUTERS/Wolfgang Rattay/File Photo

Authors: Elizabeth Howcroft and Simon Jessop

LONDON (Reuters)-Companies that invest in climate action in the most polluting industries often find that their valuations are lower than their slower counterparts, highlighting the difficulty of getting shareholders to support sustainable development.

Investors have invested more than US$30 trillion in environmental, social, and corporate 07-18 Data from the Global Sustainable Investment Alliance shows that the governance (ESG) strategy.

But the demand for sustainable investment has not yet eliminated the pressure to put profits first, and climate-supporting analysts are worried about the outcome of the UN climate negotiations earlier this month Too little help.

Reuters exclusively saw management consulting firm Kearney’s November analysis of global companies, and Credit Suisse (SIX:) A report released by Group AG in April found that the average value of companies that reduce emissions in industries with high costs and limited government regulation is lower than their peers with more emissions.

Only when the cost is relatively small and government support and supervision are relatively strong, investors will reward companies with the largest emissions, such as energy, mining, and heavy industry, to respond to climate change.

Betty Jiang, head of ESG research at Credit Suisse USA, said: “Investors want climate leadership, they want practical transformation plans, but at the same time they are only willing to reward companies that can do this without sacrificing returns.”

Given that people’s attitudes have changed as climate change becomes more extreme, some people see opportunities for cheap investment in companies before the market places more emphasis on climate action.

Others worry that the risk of value loss makes the company’s board of directors reluctant to take action to avoid catastrophic climate change, especially during the UN meeting in Glasgow this month, when governments failed to send a strong message that global warming can Keep it within 1.5 degrees Celsius (2.7 degrees Celsius). Fahrenheit).

“Currently, there is no clear line between climate investment and its impact. The green (investment) portfolio is not yet equivalent to the green planet,” said Anthony Cowell, head of asset management at KPMG.

European investors pay more attention to sustainability

Kearney calculated the valuation of 481 companies worldwide based on cash flow.

It then evaluated their climate actions using the Transition Pathways Initiative benchmark (TPI), an investor program launched in 2017 to evaluate the company’s response to climate change.

In the absence of a TPI score, Kearney regards the company’s greenhouse gas emissions as a percentage of its revenue to allocate ESG leadership or lagging status.

Kearney’s analysis found that the average valuation premium for European steel, chemical, cement, and power companies with top carbon emission reduction plans is 62%, and the latter are the laggards in climate action.

In the rest of the world, this premium is 25%, indicating that European investors place more emphasis on sustainability than other investors around the world.

In the aluminum, aviation, automotive, diversified mining, infrastructure, shipping, and oil and gas industries, companies with higher climate scores show the opposite trend.

The analysis found that in Europe, their transaction prices were on average 27% lower than those of environmental laggards. In other parts of the world, this discount is even greater-41%.

Although there are many factors that affect the company’s valuation, Alexis Deladerriere, Head of International Developed Market Equity Goldman Sachs Group Inc (NYSE:) stated that in industries with high emissions, ESG scores are not reflected in the company’s valuation premium.

“Basically there is no correlation-no valuation premium-the ESG score is higher overall, or specifically, the’E’ score is higher,” said Deladrière.

“If your behavior is bad, if you are polluting and you don’t take any action, will you be punished for doing that? Unfortunately, not in the short term.”

Energy, mining

The energy and mining industries are subject to risks that may affect valuations, but there is still evidence that industries that play a leading role in decarbonization have not been rewarded by moving away from fossil fuels.

For example, BP (NYSE:) Plc is considered a climate leader and has the highest “4STAR” TPI level.However, compared to many ESG laggards with low TPI scores (such as US peers), it has a lower valuation as measured by the ratio of corporate value to cash flow Valero Energy Company (NYSE code:).

In the mining sector, Rio Tinto (NYSE:) Plc is considered a climate leader with a TPI score of 4, but its valuation premium is less than one-third of Freeport-McMoRan (NYSE:), the latter being Climate-Cole Nigeria’s data shows that the TPI indicator lags behind.

BP, Valero and Rio Tinto did not respond to requests for comment. A Freeport-McMoRan spokeswoman stated that the company has made “significant progress” in climate over the past two years and is committed to “incorporating our climate initiatives into our long-term business plan.”

As climate change becomes the focus of more attention by the market and regulators, some corporate directors said that as more and more investors begin to recognize climate change, the board of directors will begin to take stronger action on climate change.

Orlando Ashford, director of the board of directors of companies such as pharmaceutical manufacturer Perrigo and solar equipment manufacturer Array, said: “Every company wants to figure out how to achieve (sustainability) quickly and easily because of its investment The payback is shorter.” Technology.

“If you incorporate it into the structure of how you run your business, it will take longer, but it is not a fashion,” Ashford said.

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