BY GEORGE HAY

Sustainable investing is pivoting to Plan B. Billed as humanity’s last chance to avert disastrous climate change by committing states to halve global emissions by 2030, Glasgow’s United Nations COP26 global shindig ultimately managed nothing of the sort. In 2022 that will focus money minds on what happens when temperatures rise.

The stereotypical climate-change investment thus far has been buying shares in a renewable energy maven like Denmark’s $52 billion Orsted, which mitigates carbon emissions and slows down warming. COP26 had a new focus on adaptation, which covers what to do when higher temperatures materialise. Rich countries agreed to double annual transfers to developing countries to $40 billion for battling rising sea levels, droughts, and more violent storms.

The actual opportunity is much larger. Bank of America reckons the overall climate adaptation market will double to $2 trillion per year within the next five years. The UN’s Global Commission on Adaptation says a $1.8 trillion investment by 2030 in early warning systems, resilient infrastructure, dryland agricultural crop production, mangroves, and water resource management would yield more than $7 trillion of benefits in avoided costs from climate change effects.

To see how this would work in detail, consider the global chemicals sector. Switzerland’s Syngenta, whose Chinese owner is mulling a $60 billion listing, spends $2 billion a year on research and development helping farmers maintain yields hit by planetary warming. That includes drought-resistant cabbage and corn with deeper roots, fungicides to stop flood-ravaged crops going mouldy, and grain variants that shorten the time to fatten beef. Its $50 billion German rival Bayer is a potential winner too.

Who else is in the mix? Big engineers like Canada’s $16 billion WSP Global will be constantly engaged helping municipalities redesign infrastructure to guard against flooding. France’s Veolia is well-placed to scoop up desalination contracts to render saltwater in drought- afflicted areas drinkable. And there are racier ways to hedge against climate change.

Microsoft and Swiss Re have invested in so-called direct air capture to suck carbon from the air. Even wacky ideas like solar geoengineering to dim the sun will gain traction. Miserabilists, meanwhile, can always try $1 billion U.S. gunmaker Smith & Wesson, or an appropriate proxy for canned food. But they can achieve the same result by taking a more sober punt on adaptation.

First published December 2021

BY ROB COX

General Electric’s doing it. So is Toshiba. And Johnson & Johnson. Breakups are all the rage and rightly so: The individual parts of sprawling corporations can be better managed on their own and are arguably worth more separately than the whole. But the biggest breakup of 2022 won’t be company specific. It’s time to spin off the letters in ESG.

The initialism stands for environmental, social and governance, and it first surfaced in a 2005 United Nations report. At the time it was a handy way for do- gooders to push the investor community to invest in solving communal problems they ignored in pursuit of the bottom line. It seems to have worked. Today more than $17 trillion of U.S. assets under management are dedicated to ESG-related strategies, according to the Forum for Sustainable and Responsible Investment, and growing at nearly 20% a year.

However, lumping the issues together unnecessarily complicated fund managers’ decision-making. For example, nearly 60% of investors polled by Natixis Investment Managers believe they have a responsibility to help solve social issues. But a larger majority – 78% – said it’s primarily the responsibility of governments.

Companies that do well in carbon emissions or “E”, may fail on board diversity measures. Alternatively, they may prioritise shareholder returns at the expense of sustainability or better maternity leave and call it good governance. Aggregating ESG measurement lets executives mask failures in one domain by outperforming on another. Unlike corporate debt ratings, ESG scores vary widely depending on who is doing the measuring.

Many investors are prioritising climate change, an area where financial investments can have direct, measurable impact, and one devoid of country-specific cultural values packed into social justice measures. But corporations that are sincerely committed to attacking all three problems are avoiding a blanket approach regardless.

“E, S and G are not natural bedfellows – and we don’t use that language,” Alan Jope, Unilever’s chief told Breakingviews. “We shouldn’t look too closely at the label, but at the actions that sit underneath it.”

As 2022 kicks off, with more corporate breakups undoubtedly in the offing, it is time to give the E, the S and the G their own independence too.

First published December 2021

BY ANTONY CURRIE

Climate-change dealmaking is about to get a lot more legit. Green-tinged transactions more than tripled in value in 2021 to $164 billion by early December, per Refinitiv, though there’s no standard definition for what merits the colour. There has, though, been a dearth in genuinely environmentally useful tie-ups. Expect more to emerge. 

Some transactions claiming a climate rationale are just ecological virtue-signalling. Santos boss Kevin Gallagher argues his firm’s recent $6 billion embrace of Oil Search will help to “successfully navigate the transition to a lower carbon future”, yet he’ll increase fossil-gas drilling more than 45% to get there.

Special-purpose acquisition companies, meanwhile, dominate the eco-friendly deals list, topped by multi- billion-dollar swoops for electric-vehicle makers Polestar and Lucid. These, though, are more capital-raising public listings – albeit by the SPAC door – than mergers.

Climate-risk avoidance has been the biggest driver for the past two years, like the $50 billion creation of carmaker Stellantis. Ditto BHP’s $16 billion oil-and-gas sale to Woodside Petroleum and offloading of coal assets, or Anglo American’s Thungela Resources coal miner spinoff. These mitigate corporate exposures. They don’t tackle overall greenhouse-gas emissions.

That’ll be the next big M&A thing. It may involve, for instance, upstart electric-vehicle makers like Lucid, Polestar or Rivian Automotive combining. Equally, smaller players such as Nikola, valued at $4 billion in mid-December, could make tasty morsels for lagging behemoths like Toyota Motor or Nissan Motor.

Large environmental companies like $66 billion Ecolab and $22 billion Xylem have a history of making bolt-on acquisitions. They’re potential prey as well as predator for conglomerates like Danaher and Honeywell International. Software could be in the mix too: $61 billion Autodesk

in February bought H2O data-infrastructure specialist Innovyze for $1 billion. Such capabilities could interest green-preening tech giants like Microsoft or Alphabet.

Financial institutions need environmental data, too. Some 450 joined the Glasgow Financial Alliance for Net Zero, but few have all the resources to assess client portfolios in detail. Figuring out, say, how to finance retrofitting a fleet of CO2-belching container ships will earn more than a credit facility. Plenty will ape Moody’s, which paid $2 billion for climate-analytics company RMS. Targets may include newbies Aquantix and geospatial specialists like Kayrros. It’s time to seize opportunities, not just offload risks.

First published December 2021

BY DASHA AFANASIEVA

PepsiCo and Unilever will have new reasons to confront plastic waste in 2022. Bans on single-use items or landfill taxes pose an increasing financial risk to companies not taking the problem seriously. Activist shareholders will mould the worst offenders into shape.

The United Nations expects plastic pollution to double by 2030. Much of that is packaging. Campaign group Break Free From Plastic in October named Coca-Cola and PepsiCo as the worst plastic polluters for the fourth consecutive year, despite both vowing to use at least 50% recycled material in their plastic packaging by 2030. Unilever, which promises to collect and process more plastic packaging than it sells by 2025, came in at number three.

Governments are getting wise to corporate heel- dragging. Unilever replacing plastic mustard sachets in Britain or Nestlé ditching plastic KitKat wrappers in Japan won’t fend off tougher government responses forever. Some are looking to introduce a levy on companies

to compensate for the environmental cost of plastic packaging, either via recycling or landfill.

In Belgium, one country leading the charge, the “extended producer responsibility fee” is 200 euros per tonne for the transparent PET-type plastics widely used in drinks bottles. Applying that to Coca-Cola’s nearly 3 million tonnes of annual plastic waste would result in a charge of nearly 600 million euros, around 7% of its 2020 operating profit. Other harder and more fiddly items, like screw-tops, carry stiffer penalties.

Taxes and bans are not the only threat. If consumers could get their hands on the same product but without plastic packaging – be it shampoo or a fizzy drink – many would quickly switch. Take PepsiCo’s SodaStream: if the syphons produced fizzy drinks as tasty as that from the bottle, they could start grabbing market share.

Most consumer goods companies still score well on environmental and social metrics. But investors are getting wiser to the link between sustainability and the bottom line, as shown in June by little-known fund Engine No. 1’s successful campaign against U.S. oil giant Exxon Mobil.

Even hard-nosed activists like Nelson Peltz, who may be eyeing an assault on Unilever, see plastic as a problem. In a previous campaign, the New York billionaire pushed Procter & Gamble to develop packaging made from materials like bamboo. In 2022, plastivism will tear off its wrapper.

First published December 2021

BY GEORGE HAY

COP26 has a blind spot. The prime ministers and corporate bigwigs who gathered in Glasgow want to cut demand for the fossil fuels that constitute most of the world’s greenhouse gas emissions. To make that happen without crashing the economy, there has to be lots more of the metals underpinning a greener society.

Along with phasing out coal and reducing deforestation, COP26 needs to champion electric vehicles and spur investment in renewable energy. That means more wind turbines, solar panels, energy storage and charge points. That in turn means more aluminium, cobalt, copper, lithium and nickel.

Consultant Wood Mackenzie has run the numbers. Limiting global warming to 2 degrees Celsius above pre-industrial levels implies 19 million tonnes of additional annual copper production by 2030, a 60% increase. Aluminium supply needs to jump 30%, nickel 50%, and lithium and cobalt 140% and 150% respectively. Limiting warming to 1.5 degrees Celsius implies an even greater supply hike.

Normally this would be an epic green light for miners to get digging. After an iron ore boom, giants like BHP and Rio Tinto are awash with cash. But the gap between the investment that’s needed over the next 15 years and what’s signed off is almost $2 trillion, Wood Mackenzie says.

As big a problem is red tape. On average, it takes over 16 years to go from discovering reserves to producing metal, according to the International Energy Agency. Meeting the elevated demand will also mean venturing into trickier jurisdictions like Democratic Republic of Congo, where most western investors have feared to tread. That said, labour disputes and environmental or social rows can erupt anywhere, as Rio’s Juukan Gorge debacle in Australia proved.

That’s where politicians can help. Western governments have lists of critical materials. If they are so important, European nations and the United States can use their heft to strike agreements with mining jurisdictions like DRC. These could lay down rules of engagement to stop companies being hit with sudden taxes or expropriation, while also committing them to strict social and environmental principles.

This wouldn’t change the geopolitical headache created by China’s control of 60% of rare-earth production and its hefty sway over cobalt. But at the very least, Western powers need to start talking about the issue. Step forward, COPPER 26.

First published Nov. 5, 2021