ESG Focus: The Little Big Things – 21-11-2024

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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/

Tackling the lingering problem of PFAS; Founder-led companies outperform; meeting sustainability goals and the latest in ESG corporate news.

-Forever chemicals, a challenge and an opportunity
-The double-edged sword of founder-led businesses
-Macquarie believes the anti-ESG movement is showing signs of slowing
-Dissecting development goals for sustainability

By Danielle Ecuyer

PFAS: Not the Forever Story We Want

Recent media reports of PFAS (Per- and Polyfluoroalkyl Substances), or “forever chemicals”, in Australian drinking water at levels considered unsafe in the US have focused attention on PFAS contamination, with implications for Australian companies as regulations catch up with EU and US standards.

Jarden explains PFAS chemicals, used industrially in products resistant to heat, stains, grease, and water, include pesticides, anti-foaming agents, surface treatments for textiles, leather, cardboard, and various everyday items such as clothing, cosmetics, and food packaging.

The chemical makeup of PFAS means these substances can persist in the environment long-term, spreading through soils and water, while accumulating inside living creatures.

Research reveals PFAS impacts on health are far-reaching, with PFAS classified as a “class one” human carcinogen. PFAS-related lawsuits are rising globally.

Some recent news flashes:

–BHP Group ((BHP)): PFAS contamination has been identified at two WA sites, Mt Whaleback and Port Hedland. The Mt Whaleback contamination, discovered in 2020, relates to industrial uses. The Port Hedland contamination involves groundwater beneath a former power station, with both cases exceeding non-drinking water guidelines in residential areas.

-Transurban ((TCL)): In February 2024, a leak of hundreds of litres of firefighting foam containing PFAS occurred at a pump station in the Clem Jones Tunnel. The company confirmed no PFAS entered groundwater, storm-water, or waterways.

Jarden believes PFAS will become an “escalating” priority for the Australian government, with tighter standards for “safe” PFAS levels in drinking water expected to align with US regulations.

Companies with PFAS disclosures include BHP, Rio Tinto (RIO), Woolworths Group ((WOW)), Coles Group ((COL)), Santos (STO), Woodside Energy Group (WDS), and Transurban. 

Companies set to potentially monetise the problem include ALS Ltd ((ALQ)) which is positioned to benefit from water testing demand.

In the local small cap segment, SciDev ((SDV)) announced its first commercial order for PFAS treatment in Europe. The $96m market cap company provides environmental solutions for water-intensive industries, offering leading-edge chemistry and water treatment technologies.

The $475m contract is for the first phase of a potentially multi-phase project to design, construct, and commission a PFAS water treatment plant with Swedish Hydro Solutions AB to remediate a contaminated landfill site in Northeast Sweden.

From the press release: “Securing our first commercial order for PFAS remediation in Europe is a significant milestone and demonstrates the demand for our technologies and our capability to sell into new regions.

The market opportunity in Europe is large and rapidly growing, with more than 17,000 sites confirmed for PFAS contamination and another 21,000 sites with suspected contamination. This is the tip of the iceberg. Tightening EU regulations and mandates to clean up PFAS will drive industrial and government landowners to seek cost-effective solutions, creating an ideal and ongoing market for our remediation technology,”

Founder-Led Companies: “Skin in the Game”

Founder CEOs Richard White, WiseTech Global ((WTC)) and Chris Ellison, Mineral Resources ((MIN)) have come under media scrutiny for their conduct, albeit of differing persuasions, but both prompting governance concerns.

Jarden highlights there are approximately 30 companies on the S&P/ASX 200 that are founder-led, with ownership exceeding around 5% of each company.

Compiling a list of pros and cons, the broker notes the following points on the pro side of the debate:

-On average, share price outperformance

-Usually, an in-depth knowledge of the company, its markets, and its capabilities

-A passion for the company, which may foster a positive culture and drive business success

-A longer-term mindset that improves capital allocation decisions

-Less bureaucracy

-Strong alignment with shareholders due to the proverbial “skin in the game”

On the not so positive side, the broker highlights:

-Lack of skills or adherence to governance protocols

-Strong personalities with intertwined personal lives and large shareholder stakes, making it more challenging for boards or shareholders to question behaviour or decisions

-A lack of transparency and disclosure, with some founders operating more like private businesses

-Rigidity of views

-Succession planning issues

Jarden observes a study from Bain & Co tracking 200 founder-led S&P 500 companies over 25 years found founder-led businesses consistently outperformed peers, including a group of the world’s most valuable companies such as Apple, Nvidia, Facebook, Amazon, Google, and Oracle.

A study by Solaris Investment Management in August revealed that between 2019 and 2024, the twelve largest founder-led companies on the ASX delivered returns of 420%, compared to 65% for the ASX200 accumulation index.

Preparing for Trump 2.0

Macquarie’s monthly ESG updates zoomed in key takeaways from the Principles for Responsible Investment conference in Toronto and the Investor Group on Climate Change conference in Melbourne, focusing on the impact of the US election on climate, energy transitions, and responsible investment.

The broker highlights investment in renewable energy did not “disappear” during the first Trump administration.

The upcoming administration is expected to withdraw the US from the Paris Agreement, accompanied by reduced environmental protections, increased support for fossil fuels, and a lowering of clean energy tax credits.

For Australia, opportunities may arise if the Inflation Reduction Act is unwound, leading to reduced competition in green product exports to Asia. The Australian government’s intent to pass the Made in Australia Act through parliament would offer tax incentives for green hydrogen as well as critical minerals. Green hydrogen would require significant subsidies to make the economics viable.

In terms of anti-ESG bills, seven were passed in 2024 compared to 35 in 2023. Macquarie analysts believe the anti-ESG movement is showing signs of slowing.

The broker explains there is an inverse relationship between climate litigation and the robustness of climate policy. On this basis, climate litigation may begin to trend higher in the US.

More companies are setting net-zero transition plans, Macquarie highlights, with 5,900 in 2023 compared to 4,000 in 2022. Over 700 financial institutions globally are committed to net zero, with 450 establishing transition plans.

Australian banks are “tightening” lending standards for emission-intensive sectors.

In other ESG news, Macquarie highlights the proposed European Union 12-month delay to December 2025 for implementing Deforestation Regulation. This delay is welcomed by the Australian government because of the complex due diligence requirements for a range of Australian agricultural products, potentially impacting $234m in exports.

Companies with exposure risks include Brambles ((BXB)) with direct exposure, and Coles Group ((COL)), Woolworths Group ((WOW)), GrainCorp ((GNC)), and Metcash ((MTS)) with supply chain exposures. Nufarm ((NUF)) emphasises the benefits of its products in reducing the farmland needed, thereby mitigating deforestation.

More news snippets:

Nine Entertainment ((NEC)) published an independent review on workplace culture, including 22 recommendations to reset the company culture. An action plan is being developed for implementation in November.

BHP reached a final settlement with Brazilian authorities for reparations on the Samarco Fundao dam failure in 2015. The US$31.7bn compensation agreement does not require BHP to lift its current US$6.5bn provision.

Origin Energy ((ORG)) announced it was ending work on hydrogen development and exiting the Hunter Valley Hydrogen Hub due to uncertainty around timing and capital risks.

United Nation’s 17 Sustainable Development Goals

Morgan Stanley has initiated a new series discussing innovations, developments, policies, and regulations across sustainability, as highlighted by the UN’s 17 Sustainable Development Goals.

One recent update focuses on global temperatures, natural disasters, and companies progressing towards improved “climate resilience.”

Morgan Stanley details the number of disasters has risen five-fold over a 50-year period, “driven by climate change, more extreme weather, and improved reporting”.

Global temperatures for the boreal summer of 2024 were the hottest on record. Copernicus Climate Change Service is “virtually certain” that 2024 will globally be the warmest year on record and the first to exceed 1.5 degrees Celsius above pre–industrial levels.

Atlantic hurricanes Beryl and Helene are estimated to have caused over US$170bn in damages and economic losses.

Michael Mann, director of the Centre for Science, Sustainability, and the Media at the University of Pennsylvania, suggests that “each 1 degree Celsius of global warming can increase maximum winds in the strongest storms by 12%.”

The broker explains this is equivalent to an approximate 40% increase in wind damage.

Morgan Stanley highlights reinsurance is one of the most exposed sectors. Swiss Re’s 2023 Sigma Report revealed natural catastrophe losses reached -US$280bn, with only around 40% covered by insurance.

The report also noted a total of 142 insured loss-inducing catastrophes, setting a new annual record.

Since 1994, Swiss Re points to an increase in the incidents of these events by 7.5% on average per annum compared to a 3.9% increase in all catastrophes overall.

Reinsurers play an important role in assisting with climate change “resilience” by offering financial support for businesses and communities and aiding in recovery and rebuilding, the analysts note.

In the US, companies like Ashtead and United Rentals provided “mission-critical equipment” such as power generators, HVAC systems, pumps, and other temporary structures for post-natural disaster responses.

Generative AI is also assisting in providing more effective and timely weather forecasting. Google’s GraphCast is highlighted by Morgan Stanley as a “state-of-the-art AI model to make medium-range weather forecasts with unprecedented accuracy.”

Nvidia’s FourCastNet, a GenAI-based weather prediction model, asserts its accuracy equals that of the European Centre for Medium-Range Weather Forecasts.

Huawei’s Pangu-Weather model claims to make more accurate weather forecasts with a system trained on 39 years of global data.

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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