The WSJ article linked talking about rising ESG spending and the risks associated with it is in no way inconsistent with our view that lack of US Government guidelines is constraining ESG spending. The article focuses on the power and auto industries, which, while they face regulatory and incentive uncertainty, have a much clearer path than many others. The power industry is dealing with a customer which is increasingly asking for more renewable power, an investor base that is pushing for less reliance on fossil fuels, and a Government that is pushing for a 50% emissions reduction from the sector. The auto suppliers have clear directives from some US states and some countries about the phasing out of fossil fuel-based vehicle sales, and in some geographies, they have incentive systems that they can tap into. For both industries, there is a significant risk, in that the billions of dollars that they are investing in new plants and new equipment do not come with any guarantees that those investments will pay off well or quickly, but at least the direction of travel is unlikely to change. In other words, there will be demand for their products and investors will likely be happy with the progress – while they might not get the EBITDA they would like, they may get a better multiple of that EBITDA.
Thinking out loud, investors generally pay more for recurring income versus cyclical income, it is one of the reasons why data companies such as IHS Markit historically reported income in two buckets – recurring and non-recurring. If power and auto companies were to start reporting earnings in two segments – clean technology sales and EBITDA and old technology, investors might reward the clean piece more highly, especially if it had a clear growth trajectory, on an absolute and/or relative basis.
Our thoughts on Government inaction limiting behavior are directed at industries that do not have a clear direction of travel and where regulations/taxes/incentives are uncertain enough to drive unacceptable levels of risk concerning large capital decisions. Would energy companies see any benefit from lowering the carbon footprint of oil products and LNG? Are carbon capture and use or sequestration going to satisfy purchasers or investors that products are acceptably carbon-free or low carbon, or are projections like the DoE’s hydrogen costs going to cause both customers and investors to insist that carbon avoidance is the only acceptable form of abatement?
Source: US DOE, June 2021
