Whether it’s bailing out badly managed banks or increasing oil and gas production to replace Russian supplies, short-term pressure has a habit of knocking long-term goals off course.
If investors want companies to prioritise long-term goals – on the environment, social impact and governance – how easy is it for them to do so? With the annual meeting season approaching, a key route is to vote. Oil and gas companies, for instance, are targets in Europe for protest votes against the re-appointment of directors if they don’t try harder to reduce carbon emissions.
The good news is that most companies provide enough information to enable investors to make these decisions. The data will get better still with the first two standards from the International Sustainability Standards Board, due to be implemented from next year.
I took a look at three international companies’ ESG reporting in sectors with different sets of challenges: Diageo, the alcoholic drinks company; TotalEnergies in oil and gas; and the retailer/cloud services provider Amazon. Plus points for Diageo and Total include publishing key ESG information at the same time as their financial reports. ‘Connectivity’ is a desirable aspect of corporate information.
Plus points for Diageo and Total include publishing key ESG information at the same time as their financial reports
Lack of rigour
Diageo’s 2022 annual report and ESG reporting index hit several virtuous buttons. Its 2030 ‘Spirit of Progress’ commitments are backed up with metrics, such as a near 22% absolute reduction in carbon emissions since 2018. It has shaved the amount of water needed to produce each litre of product from a ratio of 4.81 to 4.13 times.
It is, however, a master of marketing. On responsible drinking, it is impossible to gauge the impact of educational initiatives on the masses who drink its products in more than 180 countries. On packaging, it talks of ‘technically’ recyclable materials – but there’s a long way to go in practice.
Emissions omissions
Total’s recent results announcement contains key emissions figures such as a Scope 3 (indirect) number for customers’ use of oil, biofuels and gas that is 10 times the Scope 1 and 2 total from its own sites. Its 2030 target is to cut petroleum sales significantly, but output of liquefied natural gas is expected to rise 30%, so the ambition is simply to prevent emissions rising.
At Amazon, it is not clear who counterbalances Jeff Bezos among the non-executives
Amazon claims to be the world’s largest purchaser of renewable energy. Its ‘climate pledge’ is to be net zero by 2040. But as the employer of 1.5 million people, the ‘S’ (social) is just as important, and it is not easy to judge pay and conditions beyond developed markets with minimum wages in place.
On governance, it has weaknesses by UK standards. Its founder Jeff Bezos is executive chairman, and it is not clear who counterbalances him among the non-executives, some of whom have been around for a decade or more. This helps to explain Sustainalytics’ high-risk rating.
While ESG ratings can help investors make judgments, you still have to ask yourself: (a) what the inherently risky aspects of this company’s business model are; (b) if it has a convincing mitigation plan; (c) if it is plausible that it can execute the plan up and down its value chain; and (d) how it would cope if governments forced more rapid adoption of long-term change.
