Don’t just think of ESG factors as representing an opportunity to own assets because of corporate policies and practices concerning the environment or social and governance issues. They can also serve as a warning sign about the risks of owning certain securities, those that score low on the ESG continuum.
It’s the latter approach that Sustainalytics uses in its report “10 for 2018” focusing on “10 ESG risks that could have a significant impact on shareholder value” in 2018 and the industries that are most affected.
Following are the 10 primary risks discussed in the report, the industries affected and the varied ESG standings of individual companies within those industries.
1. Hazardous Chemical Releases: Diversified Chemical Companies
This is a primary risk for diversified chemicals company and a long-lasting one, according to Sustainalytics. Chemical companies face legal and clean-up expenses and substantial reputational risk. Between 2013 and 2017, 33 diversified chemical firms were linked to 145 incidents involving contamination of land and water, and polluting air emissions.
Of the 127 global diversified chemicals companies Sustainalytics analyzed, only 6% were well prepared to mitigate hazardous chemicals risks and 57% were poorly prepared. The best prepared were Germany’s Evonik Industries and Norway’s Yara International; the worst prepared was Chemours, a U.S.-based spinoff from E.I. du Pont de Nemours.
2. Water Use and Community Opposition: Copper Mining
Mining companies are especially vulnerable to this risk, according to Sustainalytics. There are currently more than 200 conflicts between mining companies and local communities in Peru, most concerning water, for example.
Copper mining companies in Chile face similar risks but how they address those challenges differs substantially. Sustainalytics notes that BHP Billiton has and Antofagasta score highest on their water and community risk management capabilities while KGHM Polska scores lowest. Its top pick: Antofagasta Plc.
3. Energy Demand and Greenhouse Gas Emissions: Semiconductor Industry
Investors may not view this industry as a major air polluter or consumer of vast amounts of energy but they should, especially among companies operating in Asia where 45% of chip production takes place, according to Sustainalytics.
Many of those companies will face energy supply challenges as more Asia countries adopt greenhouse gas emission regulations.
Taiwan Semiconductor Manufacturing Co., with an 11% share of global fabrication capacity and demonstrated ability to manage power shortages and purchase renewable energy power is well positioned in facing these challenges. Samsung, which has less than half of TSMC’s global capacity and a renewables and emissions score close to 30 versus TSMC’s 63 is poorly positioned.
4. Carbon Emissions Regulation and Transition Risk: Oil and Gas Sector
This is a huge risk for oil and gas companies especially those that are not well diversified, have high production costs and are involved in carbon-intensive projects such as oil sands and Arctic drilling.
Those producers that “disclose strategies to manage the regulatory market and reputational risks posed by climate change are better prepared to compete in the low carbon transition than firms that do not,” according to Sustainalytics. Recommendations from the Taskforce for Climate-Related Financial Disclosures (TCFD), headed by Michael Bloomberg, provide a template for those disclosures.
Sustainalytics gives Royal Dutch Shell (high marks — a perfect score of 100 for greenhouse gas risk management — for being the only oil and gas company that has set carbon reduction targets and for entering the electric vehicle market, but it would like to see more disclosure on how the company intends to evolve its business model. Exxon Mobil (XOM), in contrast, has a score of 50.
5. Climate Change Risk: Real Estate
Rising sea levels and temperatures plus an increasing number of severe hurricanes and wildfires pose a risk to the real estate industry. “We anticipate investors will continue to express concerns about how the physical impact of climate change could affect the value of their holdings,” according to the Sustainalytics report.
The firm assessed 306 listed real estate firms,including REITS, developers and property managers and found that only 19% are well prepared to manage those risks while 51% are poorly prepared. Its analysis of 101 Asa-Pacific real estate firms found that those in Australia scored the highest for managing those risks, led by Stockland and GPT Group, which had scores of 100 and about 82, but many scored at 50 and below.
6. Antitrust Risk: Major Tech Companies