ESG Focus: The Little Big Things – 07-08-2023: Xero, Reliance Worldwide, Iluka, Elders

This story features CHARTER HALL SOCIAL INFRASTRUCTURE REIT, and other companies. For more info SHARE ANALYSIS: CQE

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future: 
https://www.fnarena.com/index.php/financial-news/daily-financial-news/category/esg-focus/

ESG Focus: The Little Big Things Charter Hall Social Infrastructure REIT, Xero, Reliance Worldwide, Iluka Resources, BHP, Rio Tinto and Elders

In this edition, we check out the broader sustainability theme: it seems ESG M&A activity is back, according to a new report; Goldman Sachs checks out Australian stocks to sustainability; IAASB hands down an audit proposal; and nations are at loggerheads over seabed mining.

-ESG M&A activity back on the boil
-Goldman Sachs observes growing ESG commitment and picks stocks
-IAASB issues ESG audit proposal
-Key greenwashing phrases
-Moratorium on seabed mining

Compiled by Sarah Mills

Sustainability is back in the spotlight after an interest-rate induced hiatus, and while unsure of the take-off date, analysts are lining up their ducks.

Big Jump In Global M&A Thanks To ESG

ESG themes have driven a strong rebound in the June quarter in global M&A deals, according to a recent report by Global Data titled Mergers and Acquisitions Deals by Top Themes and Industries in Q2 2023 – Thematic Intelligence.

“Global mergers and acquisitions deals have shown a remarkable quarter-on-quarter rebound, surging 28%,” says Global Data.

Deals rose to US$602bn in the June quarter, up from US$469bn during the March quarter, after four consecutive quarters of decline. 

Of that ESG-oriented deals comprised 104 worth US$145bn. Global data expects ESG to continue being a major driver of M&A activity going forward. 

The data shows mega deals (deals in excess of US$1bn) jumped 46% in the June quarter to 124 from 85.

North America was responsible for the lion’s share of deals, sealing 3,185 worth US$291.bn.

The Asia Pacific fared less well (excluding China) and Global Data sheets this back to growing caution toward the region.

But the M&A market is not yet out of the woods, Global Data expecting it will remain sluggish in the December half as interest rates dampen sentiment, before finding a solid footing in 2024.

Meanwhile, Reuters reports net positive flows into sustainable funds in the June quarter totalling US$18bn, aided by the sector’s exposure to the technology sector.

While historically weak and reflecting a slowing in demand, the US$18bn compares with US$37bn in withdrawals from other investment categories. 

The US experienced particular weakness, possibly reflecting political backlash, says Morningstar. US investors withdrew -US$635m for sustainable funds in the quarter, marking three consecutive quarters of outflows.

Goldman Sachs On How Australia Stocks Link With Sustainability

Goldman Sachs observes in an October report that ESG assets now comprise 43% of total Australian managed funds and observes a shift to a “desire to accomplish” rather than a “desire to support” global ESG goals but says the pace of this change is unclear.

The brokers says its discussion with major clients suggests this trend will likely benefit companies that provide critical inputs to green solutions (i.e. impact companies), particularly those companies with above-average relative returns to peers; companies that provide affordable access to critical social infrastructure, goods and services; and those that successfully decarbonise or transform their business mix (ESG improvers).

Goldman Sach’s buy-rated stocks on these measures at the time included:

-Charter Hall Social Infrastructure REIT ((CQE)); Xero ((XRO)) and Reliance Worldwide ((RWC)) for inclusive growth;

-Iluka Resources ((ILU)) Rio Tinto ((RIO)) Mineral Resources ((MIN)) and BHP Group ((BHP)) as Greenablers; and

-Elders ((ELD)) as an ESG improver. 

Greenwashers On Notice

The International Auditing and Assurance Standards Board (IAASB) advises that its global audit standards should be finalised by year end.

The board set out its proposals on Wednesday and consultation closes on December 1.

The standards are likely to be voluntary but this may only be temporary if the European Union is anything to go by. The EU has made external assurance mandatory.

One would expect that most Australian majors are well prepared for the changes but those that are not could suffer the consequences.

Meanwhile, SEC chairman Gary Gensler has said the commission’s final climate disclosure will likely need to be changed to satisfying growing opposition.

Back home, Lexology advises that the Department of Climate Change, Energy, the Environment and Water has provided guidance for Australia’s offshore wind sector.

Catch-Out Phrases

As the disclosure net tightens, the European Union has put forward a few phrases consumers and one assumes investors should be aware of.

They include: “climate neutral” and “100% CO2 compensated”, which both suggest a reliance on what Bloomberg Green describes as dodgy carbon offsets.

It is generally understood that big capital will be supporting genuine decarbonisers over those who purchase offsets, unless of course the industry’s goods and services are particularly useful.

Bloomberg Green also suggests keeping an eye out for superlatives such as “the greenest you can buy” or for companies pointing to reduction targets “50% fewer emissions by 2030” that fail to provide comparison points.

As the plastic theme starts to gear up over the next couple of years, consumers and investors are advised to examine claims that a product is biodegradable, compostable, or made of bio-based plastic.

Even if plastics are bio-based, they still have similar problems with degrading safely in the environment, so full recycling is the way to go.

Seabed Mining Still Afloat But Moratorium In Play

Meanwhile, ructions have emerged among the International Seabed Authority’s (ISA) members over the controversial issue of mining the seabed for EV battery minerals.

The International Seabed Authority (ISA) (the organisation that regulates deep see mining in international waters for 168 nations and the EU) presided over a stoush, primarily between China and Nauru which resulted in a further delay to regulations.

By way of history, the organisation has been working on a legal framework to govern seabed mining practices since 2016 and Nauru, in 2021, attempted to activate a rule that required regulations be adopted within two years.

China proved the main opponent to Nauru’s (which considers itself to be the main victim of such mining) 2021 bid to activate a rule requiring regulations be adopted within two years.

All mining companies must be sponsored by an ISA member state, which is then bound to make sure their companies comply with regulations and collect royalties and fees.

However, Nauru was the state sponsor for Canada’s The Metals Company, but baulked when the company announced it was intending to mine the seabed in 2024 for EV battery minerals. Some observers suspected the two were in cahoots.

China also upended a bid from Chile, France, Palau and Vanuatu in ISA’s Assembly, to ban mining licence approvals until regulations are implemented.

Attendees did agree to work towards adopting regulations in 2025, without setting a deadline.

But observers say that ISA is highly unlikely to approve mining licences until regulations are enacted, which suggests a hiatus in deep-sea mining.

A moratorium was supported by a growing number of members, with 20 nations, including Canada, Brazil, Portugal, Ireland and Finland, while France has demanded a full ban.

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future: 
https://www.fnarena.com/index.php/financial-news/daily-financial-news/category/esg-focus/

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