The ESG investment shakeup could be one of the major events of this year, and as many of the headlines in our daily report suggest, there is a lot of work to be done, whether it is agreeing on a common set of measurement metrics – note the US and European differences discussed in one story – or the introduction of more empirical methods to judge whether what is labeled as an ESG investment fund is labeled correctly. There is also the issue of comparable disclosures, especially for companies in complex industries. It is interesting to note that in many analyses we see around carbon footprint or greenhouse gas emissions, and the potential routes to and cost of abatement, the chemical industry is omitted, except for ethanol and hydrogen. This is despite the industry accounting for 15% of the non-power emissions in the US industrial sector (similar in size to refineries). We believe that this is because the complexity of the industry makes it hard to model, and analysts choose to exclude it because they are not sure what they are doing.
We expect that comprehensive disclosure, as seen in the recent Dow report, will form the basis for required regulatory disclosure and the SEC may use the Dow template. The investment community would likely welcome the changes, although many funds will find that they are holding companies that contaminate their specific ESG story – one of the reasons why we think the ESG definitional safe bets – especially in energy transition have material upside this year – wind, solar, biofuels and possibly fuel cells (although the hydrogen needed to allow these businesses to grow quickly is 3 years away at best.
But the second change that we expect, and this will be a real challenge for the chemical industry, is the growth of funds flowing into “emerging” ESG funds – funds focused on companies with the most concrete plans to improve their ESG profile, with most of the focus on E. Dow for example, despite its excellent report, is not out of the woods in our view as investors will be looking not only for more granularity around how the company plans to reach its stated targets – carbon emissions and plastic waste – but may also push for more ambitious targets (as may customers). The precedent that was set in the Dutch courts with the recent ruling against Shell, should be a concern for all. Passage of an improved CCS incentive in the US could spur significant incentive to capture and sequester carbon and this may take some pressure off the industry.
In the exhibit below we see the European Carbon price returning to its recent highs, but like the 45Q CCS tax incentive in the US, it needs to move higher to the investment juices flowing absent other government subsidies. For more on this subject see today's ESG and Climate report.
Source: Bloomberg, C-MACC Analysis, June 2021
