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The “E” in ESG: 10 Trends to Watch

ESG

By Tom Abrams, CFA  |  February 9, 2022

Carbon in our global system is an incredibly complex, interrelated topic. But climate understanding is evolving quickly, the discussion is broadening, and the risks are becoming better understood. More and more firms are making efforts and plans to reduce their carbon footprints in the years ahead. Will it be enough to meet 2050 goals? Most likely not but that realization, too, could have an impact on many key dynamics including consumer behavior, policy, and investment decisions. With the ongoing focus on environmental, social, and governance (ESG) investing, here are 10 “E” trends to watch that will illustrate the pushes and pulls that are occurring.

1.    Carbon Capture and Sequestration (CCS)

CCS will become a greater focus as becoming net-zero carbon will otherwise be very difficult. This will not only apply to agricultural practices, food choices, and forest development but also could be a positive driver for oil and gas and industrial processes.

2.    Increased Supply Chain Efforts

Companies with fewer Scope 1 carbon emission reduction opportunities of their own (e.g., data centers and light manufacturing) will increase efforts to reduce Scope 2 emissions at their suppliers.

3.    Blurring of Issues Across Certain Industries

Emission clarity could diminish for some industries as technology and transitions to alternative fuels accelerate. Some examples:

  • The energy industry develops biofuels, CO2 capture, and hydrogen resources
  • The aviation industry adds biofuels
  • Parts of the trucking and bus sectors electrify
  • Increased focus on recycling systems
  • Availability and implementation of new packaging choices

4.    Small Efforts Could Accumulate

There are a million initiatives and technology developments across the economy to lower emissions intensity such as incremental, non-headline grabbing investments to replace carbon-based “distributed power” (e.g. oil and gas engines, real estate solar), with clean distributed power (small solar, electrification, and hydrogen). More are on the way. At some point these efforts could add up to a meaningful downward impact on carbon emission intensity trends and forecasts in the 7-10% range. However, that point won’t likely be reached in 2022 or 2023 and may be offset by continued economic growth; but the conversations about these efforts will widen and may lead some to feel enough is being done.

5.    Focus on Private Company Emissions

Private company emissions, which to date have been even less transparent than for many public companies, should get more focus, particularly those of the larger private firms.

6.    Policy Impacts

In as much as many policy debates are not about the end point but the transition to the end point, more understanding of the issues could heighten focus on incentives to accomplish carbon goals. These incentives could include more widely pricing carbon, tax code adjustments, and emissions regulations.

7.    Standardization of Reporting

Reporting will become more standardized as regulators and standard setters as well as companies themselves want to know what’s going on in their operations (Scope 1), with their suppliers (Scope 2), and with their customers (Scope 3). More data should also become available, as many more firms report some metrics and estimate supplier and customer emissions. Better measurement should lead to more holistic efforts in the decision chain of where to focus attention and investment.

8.    A Broader Climate Lens

More and more people will see their worlds through a climate lens. There are several potential implications of this shift:

  • The general public could be motivated to make necessary changes in consumption behaviors
  • As the complexity of the entire energy metasphere is contemplated, the soundbite calls for action may become more nuanced and targeted. This evolution may diminish the risk of calls for cliff-like divestment, for example, as more appreciate the time required for a longer-term, managed energy transition that does not cause serious economic, political, or heating disruptions along the way.
  • Greater understanding that certain carbon-emitting parts of the industrial economy have been working on energy efficiency for decades; with the current focus on emissions, 25%-50% carbon reductions are still ahead. Many of these segments are essential to the economy but are energy-intensive industries that are difficult to completely electrify. Some industries, such as cement and steel, will be required for mitigation efforts.
  • A better understanding of global issues may impact foreign policy and aid, bringing additional attention to global inequalities, global fuel uses, and the inevitable and large immigration issues climate change could create

9.    Risk-On Risk-Off

Just as balance sheet leverage can change a firm’s risk profile, investors may see improvement in emissions performance as a driver for performance rather than the level of emissions. Single-decision ESG-driven strategies may evolve from “who’s best?” to “who’s improving the most?”.

10.    Environmental Concerns Translate to Risks

Firms will need to account for the risks to added operating or capital costs, to policy changes, to shareholder preferences, and even the right to operate or expand. Volatility and risks should persist given that there is a growing realization that the globe will not meet the United Nation’s CO2 emissions goals. For the foreseeable future, the capital stock of the world will include conventionally powered vehicles, tens of millions of commercial buildings, hundreds of millions of residential units, and vast fleets of non-renewable power generators. At the same time, the developing world wants to develop. Along the way investors may respond to negative outlook reports from, for example, the Intergovernmental Panel on Climate Change (IPCC) in late February or the U.S. Energy Information Administration (EIA) in March, with sudden jumps in risk-off behavior. If stories of changing weather patterns and climate damage continue to increase, there will be more fear in general in the air. All these realizations and fears may, in turn, cause further and harsher shifts in policy, redirected investment, and consumer behavior. An example could be rising calls for much higher investment to mitigate climate change that will in turn lead to new winners and losers.

The information contained in this article is not investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.

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Tom Abrams, CFA

Principal Content Manager, Deep Sector Content, Oil & Gas

Mr. Tom Abrams is the Principal Content Manager for oil and gas content at FactSet. In this role, he is responsible for integrating additional energy data onto the FactSet workstation, including drilling, production, cost, regulatory, and price information. Prior, he spent over 30 years working at sell- and buy-side firms, most recently as the sell-side midstream analyst at Morgan Stanley. He also held positions at Columbia Management, Dreyfus, Credit Suisse First Boston, Oppenheimer, and Lord Abbett. Mr. Abrams earned an MBA from the Cornell Graduate School of Business and holds a BA in economics from Hamilton College. He is a CFA charterholder.

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The information contained in this article is not investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.