ESG Focus: Reporting Season A Cracker For ESG

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ESG Focus: Reporting Season A Cracker For ESG

The FY23 ESG August reporting season was a cracker with companies across the board bumping up reporting and investments in decarbonisation; packaging recycling and waste recycling kicking off in earnest; AI, safety and cyber-crime dominating governance and remuneration; and biodiversity rocking onto the scene.

-Decarbonisation reporting across the board
-Safeguard Mechanism rounds up stragglers
-Packaging circularity investment kicks up ahead of 2025
-AI and biodiversity raise their heads
-REITS pressing forward
-Cyber-crime and safety linked to remuneration

By Sarah Mills

The FY23 reporting season proved a massive step-up for ESG on all E, S and G metrics with most of the majors now able to clearly demonstrate their success or failure on these fronts. 

Nearly all major companies, as well as many small caps, are  reporting or planning to report on emissions exposures and many have either exceeded or met their emissions targets, driven in part by the introduction of the Safeguard Mechanism this year.

Most big ASX-listed companies also registered hefty green capital expenditure during the period and forecast continuing investment.

Most of the ASX300 are now also reporting on injury and safety rates, some performing better than others, and some companies are linking these metrics to executive remuneration.

Australian REITs, already global ESG leaders, made solid headway on ESG metrics, and continued to invest in green capital expenditure despite global economic challenges.

The really big standout was a big rise in commitments to packaging circularity as major packaging and FMCG (fast-moving consumer goods) companies prepare for the introduction of national packaging targets in 2025. 

Setting targets attracts investors' attentions because it implies future green capital expenditure, long-term sustainability, and the ability of companies to attract big capital, but what is also interesting is the variety of physical approaches companies are adopting to meet ESG obligations.

This year, these ranged from biodiversity initiatives, water initiatives, partnerships and joint ventures, mergers and acquisitions, ACCU (Australian carbon credit units) purchases, power purchase agreements, and investment in renewables infrastructure.

The growing number of companies to set emissions targets not only reflects on pressure to meet regulatory requirements, but also the greater availability of renewables and improved technology.

This article focuses on emissions developments over FY23, REITs, and certain small caps.

Developments in waste recycling will be reported in part 2 of this series, along with biodiversity and AI.

Safety, modern slavery, indigenous relations, remuneration and governance will be covered in part 3.

This article owes a debt to Macquarie and Jarden researchers, who trawled through the company reports to produce the lists which underpin many of the observations in this article.

Progress On Emissions But A Couple of Big Disappointments

The introduction of the Safeguard Mechanism on July 16 fired activity up on the emissions reporting front. 

The Safeguard Mechanism requires Australia’s biggest greenhouse gas emitting facilities (projects) to keep their emissions below an emissions limit (baseline).

If a Safeguard facility exceeds this, the company has to manage their emissions by either investing in technology to reduce pollution or into a range of carbon-sink projects or carbon-credit offsets (many of which are considered dubious). ESG investors favour the former.

The baseline is expected to be lowered by -4.9% each year until 2030, forcing companies to reduce emissions over time, to a target of -43% by 2050 (from 2005 levels). Click here for more details. 

Given the startling progress on emissions reporting, it is easiest to kickstart this section with the handful of disappointments: Rio Tinto ((RIO)), Boral ((BLD)) and Aurizon Holdings ((AZJ)). 

This represents a clear break with the past, when it was easier to highlight first-adopters than laggards.

The Big Disappointments

Boral was forced to lower its FY25 emissions reduction target to between -12% and -14% of scope 1 (its own) emission and scope 2 (input emissions), from -18% after the company reported delays in approval for alternative fuel use for itshlorine bypass.

Macquarie advises that the delay jeopardises the company’s capacity to meet the Safeguard Mechanism, exposing it to potential penalties (and one assumes it may force the company to the carbon credit market). Management expects the company will meet requirements with investment.

Given the company lodged the application for approval in FY21, it is hard to know where this leaves them and what recourse is open to them (and one assumes for others who ever find themselves in a similar approval quagmire). 

On the upside, management advised it would update its FY30 target within a year. It also called for the introduction of a carbon border adjustment mechanism to protect its business from unregulated offshore competitors, saying a CBAM (carbon border adjustment mechanism) needs to go hand in glove with the safeguard mechanism.

Management also observed recarbonisation was gaining greater global recognition, which could offset up to 20% to 55% of the cement process emissions.

Cement recarbonisation refers to a process in which part of the CO2 emitted during cement production is reabsorbed by concrete during its life through carbonisation (the slow reaction between lime in the cement with CO2 in the air to form calcium carbonate in ageing infrastructure). 

At the end of their lives, buildings are demolished and the concrete is crushed, greatly increasing its surface area, allowing it to absorb more CO2, particular if exposed to air in piles for several months prior to reuse.

The company is also investing in technology-driven supply-chain improvements with an ESG focus.

Rio Tinto was the other big ESG disappointment, announcing a pre-tax alumina impairment of -US$1.175bn (-US$828m after tax) at its Gladstone refinery in its June first-half result. Macquarie observes the impairment was driven by the Safeguard Mechanism, tough trading conditions, and reliance on offsets to meet FY25 target of a -15% reduction in scope 1 and scope 2 emissions.

The impairment includes the complete write-down of the Yarwun refinery and a -$227m impairment of the QAL plant.

Management attributed the QAL impairment to delays to engineering and construction timelines, stakeholder engagement and the need for extra abatement due to product expansion.

To add insult to injury, the aluminium price plummeted from all-time highs in early FY23, as sky-high energy costs caused many European smelters to close.

Critics of Rio Tinto have been labelling the company a laggard on the alumina emissions front for years, and it appears the chicken has finally come home to roost. 

The company has committed to making up the shortfall through nature-based solutions alongside securing high-quality carbon offsets (which we observe above are considered by ESG investors to be sub-par even if the quality is good).

The company is also examining a series of greening investments at QAL, Yarwun and its North America operations.

The market largely shrugged off the miss, focusing more on declining global economic demand but when it comes to attracting big capital, a couple of losers in a sea of gainers, does tend to draw attention.

Aurizon was also caught short by the Safeguard Mechanism, advising it would have a carbon liability for the first time in FY24, and joins other disappointers in buying offsets. 

The company advised it had bought enough ACCUs to fund the liability and set a target to cut its thermal coal exposure to 10% to 20% by FY30 from 27% now, by growing its bulk and containerised freight businesses. 

Management plans to cut emissions intensity by -10% by 2030 by cutting locomotive diesel and coal dust emissions and is trialling low-emissions fleet technology.

Now For The Big Improvers

A far more numerous cohort than disappointers, improvers include companies who have either accelerated targets or made material progress on existing targets.

Zooming across to Rio Tinto’s rival Fortescue Metals Group ((FMG)) for comparison, the company has set a target to achieve Real Zero scope 1 and 2 land emissions across its iron ore business by 2030 (meaning no offsets and no fossil fuels), and all emissions targets will be verified by the Science Based Targets initiative (SBTi).

The company committed to no longer buying voluntary carbon offsets unless legally compelled.

The company has five investment decisions for its green energy portfolio due at the end of this year and has completed its 2GW electrolyser manufacturing facility in Gladstone.

Transurban ((TCL)) managed to hit its SBTi 2030 targets seven years ahead of schedule, having cut emissions by -56% since 2019, compared with a -50% target.

Charter Hall Long WALE REIT ((CLW)) brought forward its 2030 scope 1 and 2 net zero targets by five years to 2025. Ditto for Charter Hall Social Infrastructure REIT ((CQE)) for emissions under operational control)

Abacus Group ((ABG)) brought forward its commitment to hit net zero for scope 1 and 2 emissions to 2030 from 2050 and advises it has already achieved a -34% cut in emissions intensity since 2019.

Telstra ((TLS)) hit its scope 1 and 2 targets seven years ahead of schedule according to Jarden, but Macquarie observes the company is currently falling behind on its 2025 100% renewable energy target due to project risks and timing.

Low-emitter ASX ((ASX)) got organised and cut both scope 1 and 2 emissions by -99% (and purchased 2% worth of carbon credits) and is targeting FY25 net zero scope 1 and 2 emissions.

Stockland ((SGP)) brought forward its net zero scope 1 and 2 emissions target to 2025 from 2028, and its commercial property portfolio outperformed its FY24 target by 10%. The company also expected to cut most material scope 3 emissions -50% by 2030, and lined up all its scope 1, scope 2, and scope 3 ducks for 2050. 

Bendigo & Adelaide Bank ((BEN)) announced it had no direct lending exposure to coal, coal-seam gas, crude oil, natural gas, native forest and logging projects; had maintained its carbon neutral status; and planned to cut absolute emissions by -50% by 2030 and -95% by 2040.

Cochlear ((COH)) exceeded its 2025 scope 1 and scope 2 target by -25%, after cutting emissions by -68% from its FY19 baseline. The company is targeting net zero scope 1, scope 2 and scope 3 emissions by 2030. The company expects to have completed an inventory of scope emissions in FY24.

Spark New Zealand ((SPK)) exceeded its FY23 scope 1 and 2 emission target, and over the year, all new fleet vehicles were either electric or Plug-in Hybrid EVs.

New targets set, including Scope 3

Plenty of companies set new targets, including targets for scope 3 emissions. 

On the scope 3 front, a2 Milk ((A2M)) added an interim on-farm target of -30% by 2030 to its 2040 target. Scope 3 emissions are upstream and downstream supply-chain emissions and are the last of targets generally adopted because they are more complex and outside of a company's direct control.

The company also started installation of a 100% renewable energy high-pressure boiler at Mataura Valley Milk, which is expected to cut emissions there by -99% and has started on-farm methane abatement feasibility studies.

Sandfire Resources added a -35% absolute reduction in scope 1 and 2 emissions by 2035 from FY24 including Motheo to its existing targets of sourcing 50% of electricity from renewables by FY30 and achieving net zero by FY50 (for scope 1 and 2).

Seven West Media ((SWM)) committed to cut scope 1 and 2 emissions by -50% by FY30 from FY22, using grid decarbonisation, building consolidation and LED lighting. Macquarie observes 92% of the company’s emissions relate to electricity – a relatively easy fix.

Others to set new targets included: Coles ((COL)); Centuria Industrial REIT ((CIP)); Carsales ((CAR)); Seek ((SEK)) NRW Holdings ((NWH)); Centuria Capital Group ((CNI)); and James Hardie ((JXH)).

Beach Energy ((BPT)) set its first scope 3 estimate and advised it would improve scope 3 reporting during FY24.

Contact Energy ((CEN)) made solid progress on emissions cuts, including a -47% cut in scope 3 emissions (a focus area for FY24), and plans to be net zero in scope 1 and 2 by 2035. The company is also investing in battery technology but advises high-quality carbon credits in forestry partnerships may be required, observes Macquarie. 

But the bulk (93%) of energy it generated in FY23 was renewable and the company has a big, expensive pipeline of renewables projects set for the next few years.

The On-Track Fleet Is Numerous

Many companies announced they were on track to meet targets and either logged strong progress against targets, or had submitted targets to the SBTi.

Progressers included Brambles ((BXB)) and Qube Holdings ((QUB)), with several scope 1 initiatives aimed at transitioning its fleets and solar rooftop initiatives designed to cut scope 2 emissions.

Worley ((WOR)) is on track after cutting scope 1 and scope 2 emissions -64% since FY20 and the company's business continues to benefit from the accelerating appetite for green metals and infrastructure.

Among the mining-related names, Deterra Royalties ((DRR)) is on track as is Evolution Mining ((EVN)) and Beach Energy.

Origin Energy ((ORG)) hit its short-term equity emissions target but its total scope 1 and 2 equity emissions rose 4%, observes Macquarie, due to increased electricity generation, and emissions from coal rose to 12.5% from 11.5% as a percentage of revenue.

The company has not yet decided on the timing of the Eraring closure and is assessing the market for an appropriate exit. Macquarie’s utilities analyst expects Eraring will be extended.

The company has invested in rewneable energy storage and has committed $660m over two years to initiatives.

Flight Centre ((FLT)) submitted targets to SBTi in December and expects an outcome this month and includes a commitment to purchasing 100% renewable electricity across 25 countries.

CSL ((CSL)) also managed to meet the June 30 deadline to submit its target to SBTi (one assumes it will be approved) and has been engaging with suppliers on scope 3 emissions, all of whom have committed to set their own SBTi targets by 2024. It has achieved 100% renewable electricity in Europe through power purchases. 

Inghams Group ((ING)) meanwhile, submitted an SBTi plan in March and is still awaiting a response. The company is spending on upgrading its Tasmanian processing facility and plans to source 75% of its electricity from green sources by 2030.

Retailer JB Hi-FI ((JBH)) is on track; as is Treasury Wine Estates ((TWE)).

REITS Pushing Ahead

Australian REITS are generally world leaders on the ESG front, which helps de-risk their operations somewhat heading into a bumpy period for global commercial real-estate in particular.

But there’s no resting on one’s laurels. To keep up, they must continue to spend on ESG initiatives across their portfolios; and green capital expenditure proved a feature of FY23 reporting. 

As noted above, a raft of REITs continued to log solid progress in FY23 and many announced upgrades to capital expenditure going forward.

In addition to the names mentioned above, a few developments stand out.

Dexus’ ((DXS)) NABERS (National Australian Built Environment Rating System) energy rating eased from 5 star in the December half to 4.9 star in the June half, and its water rating fell to 4.5 from 4.8. Macquarie observes the company’s energy and water intensity increased but remained below target.

HomeCo Daily Needs REIT ((HDN)), while no means a leader, is on track with its scope 1 and 2 carbon emissions targets, but its NABERS rating eased to 3.8 stars from 3.9 in the December half. HealthCo Healthcare & Wellness REIT ((HCW)), also appears to be on track.

Goodman Group ((GMG)) is on track to be carbon neutral by 2023 for its portfolios, is was GPT Group ((GPT)). Goodman Group advised all new developments hope to have: a 6-star Green rating; 75% of furniture verified; 20% of materials sources from existing fitouts; and 50% of furniture procured by Spatial Hub (a First Nations-owned business).

Growthpoint Properties ((GOZ)) is also spending up on GreenPower but is considering buying carbon offsets in FY25. Its NABERs Energy rating was stable at 5.2 stars, as was its GRESB (Global Real Estate Sustainability Benchmark) score of 81, observes Macquarie.

Lendlease Group ((LLC)) is on track to meet its net zero carbon ambition by 2025 and continued to make progress on renewables adoption.

Mirvac Group ((MGR)) is also on track. Its NABERS energy rating eased to 5.2 from 5.3 and the company held a 4.8-star water rating. 

Vicinity Centres ((VCX)) was also on track but advised it may have to purchase offsets to deal with a small amount of residual carbon. NABERS: 4.6 stars. Water rating: 3.9 stars (down from 4.0 in FY22).

Region Group ((RGN)) had planned to establish a scope 3 emissions baseline but that has been delayed due to the focus on the company’s solar rollout. Otherwise, Macquarie observes the company made good progress on its emissions targets over the year.

Small Caps Have A Way To Go

Macquarie checks out a few small caps in the auto sector and emissions progress lags their larger counterparts, with most being at the planning stage. But they are still investing heavily in green infrastructure, and there are those who are generating green revenue.

Maas Group ((MGH)), for one, is benefiting from a big pipeline of infrastructure and renewable energy projects.

Bapcor ((BAP)) launched a carbon roadmap, suggesting it still has a way to go, and had installed a solar panel system, electrical units and charging stations.

GUD Holdings ((GUD)) logged an increase in both emissions and emissions intensity over the year due to its acquisition of Autoparts Group and Vision X, which combined constituted 60% of the company’s emissions.

Seven Group ((SVW)) is continuing solar rollouts across Coates and Westrac; and Macquarie observes Coates is “well-prepared to capitalise on increasing renewable infrastructure pipeline”, thanks to increases in its green fleets.

Super Retail Group ((SUL)) posted a -11% fall in scope 1 and 2 emissions in FY23 thanks to continuing electricity decarbonisation. Netwealth ((NWL)) is expected to finalise a carbon reduction plan this half.

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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