Weekly Thematic

Climate Change Activism and ESG Investing – The Same But Different – Here To Stay and Gain Focus and Momentum

September 8, 2020

Products Mentioned:
Hydrogen, Carbon Dioxide, Ethylene, Refining, Methanol

Companies Mentioned:
Dow, Air Products, CF Industries, LyondellBasell, Westlake, Linde, Formosa, Air Liquide, BASF, Ineos, Olin, Eastman, Nutrien, Cabot, Celanese, Mosaic, Sasol, TPC, Methanex, Nova, Ascend, Orion Eng. Carbon, Oxea, SABIC, Arkema, Albemarle. WR Grace, Shintech, PQ Corp, Solvay, Covestro, Ingevity, Ashland, Braskem

Subjects Covered:
ESG Investing, Climate Change, Carbon Sequestration, Tax Incentives, Fuel Efficiency, Renewable Power, Renewable Fuels

C-MACC Perspectives No 27

Climate Change Activism and ESG Investing – The Same But Different – Here To Stay and Gain Focus and Momentum

ESG and/or Socially Responsible investing is driving investor and corporate behavior, but likely not as much today as it will in the future. Today definitions around ESG are messy and we expect them to become more focused and more accurate/appropriate within a couple of years – leading to increased use.
Climate Change activism: within and outside ESG imperatives is much more focused and the analysis today more empirical. Greenhouse gas emissions are measurable, and polluters are finding more shareholder pressure, limited access to capital and more expensive capital. Regulations are likely to evolve to make operating high carbon footprint businesses more expensive sooner vs later.
Both ESG money managers and the climate change lobby are going to focus increasingly on improvement, and it is in corporates’ best interest to ensure that the right things are being measured – this is an urgent need for Chemicals.

This is a comprehensive report – please see the attached PDF below for full content

See PDF below for all charts and tables

ESG

Manufacturing industries, as well as many others, are devoting more time and resource to address the needs of ESG investors. In our view, despite its good intentions, it is far from a mature process and needs work. The amount of money that is flowing into what claim to be ESG based funds is staggering (Exhibit 1) and the money flow alone (relative to flow into other funds) is almost guaranteeing outperformance; it is simple supply and demand.

Exhibit 1: Morningstar 2Q Analysis Of ESG US Inflows – Link

But what are you buying? Despite the well-meaning nature of the investment managers and ETF providers, today you are buying something that has an inconsistent and largely intangible basis – this is driven by a couple of factors.

There are too many providers of ESG rating and ranking metrics
- At one point in 2019 there were more than 100, but even today there are too many that are being taken seriously
They do not have the same factors to define or rank the E, S and G components
- A top 10 “S” company on one metric may be excluded on another
- Attempts to standardize across industries that are not the same and companies that are not the same, result in companies being rewarded with high ESG scores that they do not deserve, and others being penalized where they should not be.