Placing the “E” in Strategy

by Conor Hussey and Irina Scarlete

Thought leadership on the topic of whether business can align with the need for societal shift towards decarbonization and sustainable alternatives to create more value will continue to be divided. Society still needs to sort through the systems at play while we gain critical mass around the merger of political will with financially recognizable metrics of success and knowledge resources from the environmental, social, and governance (ESG) spheres. Yet, there are ways for businesses to leap ahead in the meantime.

This piece is not a presumptuous attempt to state all business should “go green” or a push for Corporate Social Responsibility (CSR). It is meant to show that there are instances where shareholder and business objectives can and do adhere to societal value creation. The focus here is on the “E”, or Environment, in the implementation of ESG strategies by corporates. Specifically, why it is important and where to start.

The foundation

2019 has seen a proliferation of events which have been partially blamed on climate change, from the increase in wild fires in regions like California and Vancouver, to more frequent flooding in lowland areas and unpredictable extreme weather patterns.

The need for climate change action is not a new issue, as highlighted by the Kyoto Protocol which came into force in 2005. However, the sense of urgency to enact environmental change is rapidly growing, with more and more scientific evidence pointing to the issues we will face if something is not done soon. The 2016 Paris Agreement, which deals with greenhouse gas emission mitigation, adaptation, and finance, is a key example of the shift towards combating climate change. The Sustainable Development Goals (SDG), which came into effect in 2016, set ambitious but required targets for 2030 to tackle social and environmental challenges, are another example of strategic measures which are guiding policy and funding. Ambitious goals indeed, as the UN estimates that USD$5-7 trillion is needed annually to achieve the SDGs. More recently, the 2018 IPCC Report published in October shines a sobering light on how close we are to the climate change point of no return. As such, accelerated environmental change efforts must be acted upon by international committees, organizations and governments.

The trend for climate change action has percolated into the investment and financing arena. Sustainable investing, with a focus on ESG, is becoming more mainstream. Barclays Research, in a 2016 survey of large fixed income managers, states that within ESG, environment is the most important factor for asset owners by a significant margin. Indeed, 2018 investment in the Cleantech sector reached USD$3.4 billion across 378 equity deals, an increase of USD$900m from 2017.

In Canada, the move towards sustainable and impact investing has gathered significant pace recently, with assets under management growing 81% over the past two years, a trend set to continue according to the Responsible Investment Associations 2018 Canadian Impact Investment Trends report.

With all of the challenges associated with impacts to the environment, and shifting trends within industries, there is opportunity to focus corporate strategy to take advantage of new growth curves and capture investor trends. The key is knowing where to look and understanding how to prioritize in unison with the corporate mission.

Getting granular

For companies, the opportunity to unlock value through “E” is primarily two-fold:

• pivot to more sustainable and environmentally-focused practices which raise their ESG scores in line with long term value creation for the firm;
• take advantage of new technologies and initiatives to rapidly innovate and open new sources of value.

Finding opportunities along these dimensions begins with knowing how to perform a granular evaluation of a company’s current “environmental position”.

As mentioned in our previous article, there are several sources to evaluate “E” categories and performance within ESG. TruValueLabs (TVL) leverages the SASB framework of materiality based on industry verticals as well as a methodology which has shown long-term portfolio outperformance vis-à-vis comparable indexes.

Taking the example of resource companies in the Oil & Gas industry, the following categories have been tagged as most material to sustainable value in the mid to long-run:

• Greenhouse Gas (GHG) Emissions
• Air Quality
• Energy Management
• Fuel Management
• Water and Wastewater Management
• Waste and Hazardous Materials Management
• Biodiversity Impacts

It should be no surprise that for an Oil & Gas company, GHG emissions are getting the most negative attention in the media and from civil society at large. There is much incentive to sift through the various remediation solutions based on societal pressures alone, but the opportunity to invest in cleaner technologies and renewables is just as palpable.

Here are a few examples of companies which are targeting greater sustainability and value realization initiatives by focusing on one of the most material “E” categories outlined above.

GHG emissions:

• ExxonMobil partnered with Global Thermostat, the creators of a breakthrough technology that can capture and concentrate carbon dioxide emissions from industrial sources, to evaluate the scalability of the technology in closing the global carbon cycle. The technology drives down the costs associated with reducing emissions in power generation and manufacturing, while also enabling profitable reuse of CO2 across other industries.
• The Stelco Inc. Lake Erie Works facility, located in Ontario, Canada partnered with Pond Technologies on a multi-phase project which is set to sequester approximately 6,300 Metric tonnes of CO2 per year from its steel production processes. Pond is a technology company that provides profitable waste-to-value solutions by transforming CO2 to marketable algae-based products such as nutraceuticals. When completed, the Stelco project is expected to produce 3,500 Metric tonnes of algae biomass which can be used for high-protein feed for fish and livestock, or as a renewable feedstock for pigments, or bio-plastics.
• Thyssenkrupp recently opened a pilot plant which enables carbon dioxide-free steel production. They have started converting harmful steel mill gasses into valuable substances by processing these into synthetic gases used as starting materials for other chemicals. Quite a shift from the traditional methods to produce synthetic gases which relied on fossil fuels!

More broadly, companies in all industries have begun setting science-based targets and implementing new processes or technologies to reduce the reliance on non-renewable sources of energy. Accenture for instance, has worked with key stakeholders to define science-based targets which have been approved by the Science-Based Targets Initiative, with the focus on solutions to reduce greenhouse gas emissions, reduce energy consumption, increase use of renewable sources of energy and improve supply chain sustainability. Implementing such targets has resulted in both environmental and bottom-line benefits in the form of energy savings. These efforts translate into the avoidance of more than 857,000 tons of CO2 since 2007. Science-based targets provide a quantitative framework to measure progress toward sustainable business practices and are a contributing factor to moving ahead of the curve in ESG rankings, an often-used indicator of long-term value for investors. After all, performance must be measured.

In a nutshell

Society has become well versed on the impacts on the environment from traditional consumption patterns and this global awareness has led to a culture shift. There is a growing sense of urgency across our system: corporations, governments, investors, consumers and civil society to make environmentally positive changes in order to address challenges of a global magnitude. It may be inferred that both tax sanctions and financial incentives are beginning to align global corporate interests and investing strategies to tackle the problem but getting to a standard approach in such a complex system will take some time.

During that time, companies can take advantage of existing methods and technologies to proactively approach their “E” strategies and prioritize initiatives because, among other reasons, it makes good business sense.

References

Global Impacting Investing Network - Financing the Sustainable Development Goals: Impact Investing in Action

Barclays – ESG: sustainable investing and bond returns

Cleantech Group - 2019 Energy Trends: Answers from Cleantech Innovation Leaders

Responsible Investment Association - 2018 Canadian Impact Investment Trends Report

Forbes – Can Oil Companies Grow -- And Cut Greenhouse Gas Emissions?

Business Wire - ExxonMobil and Global Thermostat to Advance Breakthrough Atmospheric Carbon Capture Technology

Newswire - Pond Technologies Receives Binding Commitment from Inventiv Capital to Fund up to CDN $7 Million for Phase 1 of its Stelco Project and up to CDN $13.5 Million for Phase 2

Thyssenkrupp - Milestone for climate protection: Carbon2Chem pilot plant opened

Canadian Biomass - Suncor Energy invests in Enerkem waste-to-biofuel projects

Accenture - Advancing sustainability