ESG investing in the pink, green and black

“We were doing sustainable development long before Wall Street discovered ESG,” mining legend Mitch Hooke says.

The veteran of political and industry battlegrounds starred at a recent mining conference where executives debated what other letter should go into the “E” for environmental, “S” for social and “G” for governance equation.

“And I’m sitting there screaming economic,” he told international delegates in Sydney.

“You cannot be in the pink – for social – or the green – for environmental – if you’re not in the black, and that’s what sustainable development gives you.”

Once head of the powerful Minerals Council of Australia, striding the corridors of Parliament House to advise governments, he led the campaign more than 10 years ago against a mining super profits tax.

In Kevin Rudd’s words, Mr Hooke has also been “one of the most destructive voices in Australian national climate change action”.

Accepting the Legend in Mining Award at a glittering industry dinner, Mr Hooke says the Australian mining industry took on board the commitment to sustainable development decades ago and “set up a whole stack of standards”.

“If you look back at where we were in 2002, we have a lot to be proud of,” he says, to a round of applause.

But responsible investing continues to polarise opinions, even with business and governments increasingly looking to environmental and social dividends.

Research house Infosys has found a direct link between investing standards and profitability, and says looking beyond the environment to also include social and governance proves to be crucial.

Infosys executive Andrew Groth says their research points to ESG as “a value creator rather than a cost”.

For example, data shows a 10 per cent increase in women on the board correlates with a one percentage point increase in profit growth because of a different mix of minds making decisions.

Mr Groth says injecting effective cyber security into the “G” for proper governance has never been more important.

Investment bank Barclays expects further progress in 2023, after a year of market volatility led to questions about whether the approach to investing can endure.

“We believe that investor, corporate and sovereign commitments, combined with regulatory impetus, have led to an entrenchment of ESG considerations in investors’ mindset,” Barclays analysts said in a research note to clients.

Analysts at investment bank UBS say the focus is growing in Australian mining as “future-facing” commodities are in demand.

Mining and processing may have negative environmental consequences, but battery materials and rare earths are required for electrification – essential for decarbonisation and meeting emissions reduction pledges.

Diversified miners are also boosting copper and nickel operations, as the key metals are in demand for clean energy equipment such as turbines and batteries.

Mining companies are also investing heavily in green technology to be more environmentally conscious.

Fortescue Metals Group has outlined plans to invest US$6.2 billion this decade in renewable power, battery storage, and a green mining fleet.

BHP, Rio Tinto and South 32 have shifted from focusing on shareholder returns to production growth, with an increased skew towards commodities that leading scientist Alan Finkel calls “energy transition materials”.

But the majority of mining companies have businesses that rely on unsustainable inputs such as fossil fuel exposure, carbon emissions, unsustainable human capital management and market concentration.

Among the top themes for 2023, Barclays sees a heightened focus on supply chains.

More regions will fall under new laws on exposure to climate risk and regulations on modern slavery in source materials and production.

More shareholders, consumers and employees are expected to find their voice in the year ahead, alongside a new economic reality.

The energy transition from fossil fuels to renewables will require substantial upfront capital expenditure, at a time of rising costs.

The International Energy Agency estimates global investments will need to reach $US4 trillion per year by 2030 for the world to remain on track for limiting global warming to 1.5 degrees.

“With tax revenues falling and borrowing costs rising, it seems unlikely that governments will find the fiscal space for this,” Barclays warns.

Adding to doubts about targets and focus, the latest Carbon Tracker report found oil and gas companies had $US58 billion “committed to projects that are not even compatible with 2.5 degrees” warming.

Leading research company MSCI says it expects rising geopolitical tension, inflation, regulation and technological innovation to shape investment standards and climate finance in 2023.

Their 11th annual ESG and Climate Trends to Watch report says the number of financial risk considerations are growing for both companies and institutional investors, including pension funds, sovereign wealth funds, endowments, and asset managers.

The coming year is also expected to bring greater scrutiny across all industries as regulators try to protect consumers and investors from “greenwashing” or “pink-washing”, which refers to exaggerated claims of environmental of social benefits.

Litigation risk is also rising, with government mandated climate-related policies being challenged and corporations being taken to court.

“Actions related to labour and workforce disputes at big corporates are on the up, too, and we expect these to rise,” Barclays says.

In 2022, many of the world’s regulators began to crack down on greenwashing in the funds management and required financial institutions to conduct climate stress tests.

Australia’s corporate watchdog issued its first fine for greenwashing to Tlou Energy for making “factually incorrect” statements about environmental credentials.

The Albanese government says it is committed to ensuring big business is more transparent and accountable on climate-related plans, financial risks and opportunities.

Laws will be introduced to federal parliament in 2023 to hold companies to account under sustainability standards.

Investors will also continue to evaluate how the climate crisis will impact their portfolios in 2023.

The war in Ukraine and record inflation may limit near-term efforts to cut emissions as governments weigh up energy security and affordability.

However, there is broad agreement that a country’s capital is measured in environmental, social and economic dividends.

“That’s the price you pay to play,” Mr Hooke says.

“It’s not discretionary, it’s not a soft issue, and if you don’t understand that, go away.”

On energy transition and cutting emissions across business operations, he says “don’t turn back, all those bridges are burnt.”

“You’re going to have a transition, but it’s got to be a measured transition.”


Marion Rae
(Australian Associated Press)


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