The SEC took a noteworthy step in March, issuing a proposed climate-related disclosure rule that would require public companies to be transparent about their carbon emissions and their impact on the environment. If enacted, this will be a landmark step for the world of sustainable investing and corporate reporting on environmental, social, and governance (ESG) factors. It may also be a sign of initial steps to solidify how ESG metrics and evaluation are viewed by investors.
Thus far, ESG scoring as issued by leading ratings agencies has been incomplete. While a good starting point to assess risks companies face from different threats – i.e., workers’ rights violations, insulation from extreme weather, and scarcity of resources like water – ratings typically do not account for broader context. That makes them less helpful in determining both how ESG risks are managed by the company and how the company approaches sustainability.
Our recent paper on ESG due diligence explores this subject in detail. In light of the SEC’s proposed rule, it is worth calling out a clear example of where transparency on climate will impact how investors arrive at their decisions.
Consider Orsted and NextEra, two energy companies that heavily promote their initiatives to improve emissions and reduce climate risk to the company:
- Orsted is rated as “low risk” among its peers by Sustainalytics, but it is not rated at all by S&P Global. The company is a pure play offshore wind energy company that fully transitioned from a traditional energy company to a renewables provider. Once known as Dong Energy (Danish Oil and Natural Gas), the company divested its oil and gas business in 2017 and now has a 25% market share in offshore wind energy.
- NextEra, on the other hand, is a large utility company that has also been transitioning to alternative energy, though with much more modest progress. Yet despite being behind Orsted in the transition away from fossil fuels, S&P Global gives NextEra well above-average grades (86 out of 100). At its largest subsidiary, Florida Power & Light, natural gas accounts for 73% of electric generation, nuclear accounts for 22% and solar for 3%. At its NextEra Energy Resources subsidiary (which is 40% the size of Florida Power & Light), wind and solar account for 71% of electricity generation, and nuclear accounts for 26%. Simply put, the core business relies on fossil fuel sources, while its much smaller business unit focuses on green energy.
Orsted stands in stark contrast to NextEra as a modern-day example of “beating swords into plowshares.” The company was recognized this year by the Corporate Knights as the second most sustainable company in the world. The Carbon Disclosure Project gave Orsted an A grade and noted it is the only energy company with a science-based net zero emissions target – and one of only seven companies in the world with such a target.
If the new SEC rule is adopted, will it upgrade the standing of companies like Orsted in the eyes of ratings providers and the investment community?
Improved transparency or ratings on their own will not replace in-house ESG due diligence or our sustainable investing approach at Reynders, McVeigh. But it could be that the new rules lay groundwork for a more predictable, even playing field in assessing how companies improve the world around them.
There is a long way to go, and we encourage you to reach out if you have questions about how we integrate ESG into our investment process.
This material is propriety and represents the current, good-faith views of Reynders, McVeigh Capital Management, LLC (“RMCM”) at the time of publication. It is for informational purposes only and should not be transmitted or reproduced to any 3rd party without RMCM’s permission. ESG (environment, social and governance) metrics are based only on social impact, not financial performance. They may not provide a complete picture of social impact as they are only as reliable as the amount of data available. The metrics discussed above have been compiled on February 11, 2022 by independent third parties (see Sources). RMCM has no direct or indirect affiliation to these third parties. While this material includes a selection of current RMCM recommendations, it is not a complete list of the companies that RMCM recommends to its advisory clients and it includes companies that RMCM does not recommend to clients. References to specific companies are for illustrative purposes only and should not be relied upon as investment advice or as a solicitation to transact in a particular security or in a particular manner. There is no guarantee that any particular investment will be profitable. Past performance not indicative of future results. All investments involve risk. Please consult your investment advisor before making any investment decisions.All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed, and RMCM disclaims any duty to update any of the information and data contained herein. Certain statements may be deemed forward-looking, but any such statements are not guarantees of any future performance, and actual results or developments may differ materially from those discussed.