In the afterglow of the 10th Finance for the Future Awards in London, I looked at three of the corporate sustainability reports put out by prize winners. A rather long look.
All three companies – electricity generator/distributor SSE, insurer/investor Aviva and ratings agency Moody’s – have incorporated ESG (environmental, social and governance) factors into their business models. And all three are rather pleased with themselves.
Some of this is justified. Gone are the days when reporting outside the financial statements was called ‘non-financial’. These narrative documents carry numerical evidence of genuine achievement, such as SSE almost halving its Scope 1 carbon emissions from electricity generation in the past five years, or Moody’s pay for women coming within a whisker of equalling pay for ‘comparable’ men.
Numbers also feature in targets and timelines. Aviva, for example, aims to reduce ‘the carbon in our investments by 25% before 2025, and 60% by 2030’. This includes divesting from companies that make more than 5% of revenues from coal.
Such commitments will help ESG scrutineers hold managements to account, as long as they watch out for loopholes, such as ‘unless they [those coal miners] have signed up to Science Based Targets’.
You don’t have to be an opponent of ESG investing to worry about blurred focus and over-stretch
But when a relatively short report (Aviva’s) runs to 54 pages and the other two surpass 100, a forest of worthy factoids makes it hard to see the wood. The array of reporting guidelines cited run from the Global Reporting Initiative to the UN Principles for Responsible Investing. Bring on the first standards from the International Sustainability Standards Board.
It’s not only the Task Force on Climate-related Financial Disclosures (TCFD) that is in the frame, but the newer TNFD – the N stands for nature. Biodiversity has joined employee diversity, ethics, fair pay and other ‘stakeholder’ issues as these companies try to be all things to all people.
What’s not said…
If you want a contrarian view, Vivek Ramaswamy, who chairs Strive Asset Management, does a good impression of Milton Friedman turning in his grave.
You don’t have to be an opponent of ESG investing to worry about blurred focus and over-stretch. SSE, a leading renewable energy generator, more than doubled its capital spending in 2021-22 as part of a plan to invest £12.5bn by 2026 and the same again by 2030. But its sustainability report doesn’t dirty its hands with a clear explanation of how this will be paid for.
For a better view of that, you need to visit the good old annual report. It seems that SSE is changing from a high-yield utility into a growth stock, cutting its dividend, and running with net debt/ebitda of four times and a similar ratio for interest cover. Sure, it can fund its programme – with the help of disposals, investors’ appetite for ‘green’ bonds and a ‘strong regulated revenue stream. By the way, the difficulty of managing large capital projects is mentioned as a principal risk.
The proof of the pudding is in the share price, which has been more responsive to nervousness about windfall taxes than to the marketing of its saintly sustainability strategy.