Recipe for a crash: Financial markets are punishing companies that manage climate risks, operate sustainably

Pushing for a cleaner planet can be discouraging. Climate skeptics who control large amounts of capital are promoting the old energy world of polluting fossil fuels and lax sustainability standards to the detriment of the new energy world of renewables fueled by free sun, wind and water.

First case in point: Unilever. 

Over the past eight years, CEO Paul Polman has become the poster child of sustainability by investing in his brands and embedding environmental sustainability into the company’s DNA. 

The capital markets retaliated by discounting Unilever’s share relative to its peers, in effect punishing the company for its growing green credentials. This proved the perfect window for a takeover offer led by the chairman of Kraft Heinz, a partner at 3G Capital, which is well known for its ruthless approach to cost cutting combined with a total disregard for people and the environment. 

Institutional investors however love it: they are cheering on 3G’s austere approach to management discipline and its total indifference to sustainability. (Kraft Heinz doesn’t bother publishing a sustainability report for example; its shareholders don’t seem to care). 

Kraft Heinz’s attempts at taking over Unilever have been spurned, but it could renew its interest in the future so long as Unilever is made to pay for doing well while doing good, rather than being rewarded by the capital markets.

NRG Energy, the American utility giant, also attempted a transformation from fossil fuel heavyweight to renewable energy powerhouse under the leadership of another visionary CEO, David Crane. To that end, billions of dollars in cash flows from fossil fuel plants were invested in wind, solar, electric charging stations and energy storage. 

But institutional investors did not buy into the new strategy: Utility investors didn’t understand it and progressive investors didn’t back it. So the stock crashed, the CEO was shown the door and aggressive investors, after a short-term buck, are trying to break up the company. 

In Europe, another far-sighted CEO (now Chairman), Gerard Mestrallet of giant French utility Engie, put a variant of the same NRG plan in motion in 2015. 

Engie embarked on a massive transformation from fossil fuel monster to green energy angel. Last year, Engie sold its large coal plants in Indonesia and India. More recently, it sold its US portfolio of some 9,000 megawatts of generation capacity, of which more than 90 per cent is gas-fueled. Simultaneously, it is attempting to execute a global plan to replace its polluting fleet with clean energy assets, decarbonizing as fast as a large organisation can. 

The result? Its stock price is in progressive atrophy and its new CEO, Isabelle Kocher, can thank the stability of France’s approach to industrial management for not suffering the same pressure that David Crane had to experience. 

The elephant in the room

With US President Donald Trump now in charge, all of this is likely to get worse. Trump broadly represents the same strand of thought that smacked the share prices of Unilever, NRG and Engie – a sorry point of view that places zero value on the impact businesses have on people and the planet. 

It’s unfortunately inescapable that, right now, the US$150 trillion capital markets only care for short-term, quarterly profits and have but a passing interest in green, responsible investing. Surveys by various NGOs strongly reinforce this conclusion. Last year a survey by environmental data non-profit CDP found that a negligible percentage of the private sector is doing anything about pricing climate risks. 

Yet sea levels are rising; the concentration of CO2 in the atmosphere is rapidly reaching the tipping point to locking in irreversible planetary damage; fish are under threat from ocean oxygen depletion; species are disappearing wholesale and millions of people in poorer countries are already finding it very hard to cope with the real-world impacts of climate change.

Even if those factors don’t show up on quarterly financial reports now, they will soon. A large proportion of our fossil fuel infrastructure is going to become stranded within a decade or so, and investor hordes ignoring this reality are going to be hit with gradually accelerating capital depreciation. 

What investors should anticipate instead is increasing pressure from governments that understand the financial risks of climate change, and from consumers that increasingly care about how companies go about their business. 

Ignoring the environmental costs may be a near-term win, but the elephant in the room that investors ignore at their peril is the fact that 25 per cent of global emissions will be covered by a carbon price in 2017, according to the World Bank, while more than 100 countries are considering mechanisms to price greenhouse gas emissions. 

Paul Polman, David Crane and Gerard Mestrallet may be ahead of their time but they are right, and institutional investors are wrong: Rising carbon prices worldwide over the next few years will ensure that’s the case.

Complacent investors are going to pay a heavy price.

First published by Eco-Business