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Clean economy-focused firms outperform ‘dirty energy’ ones

A new report has found that there is a link between companies that focus on the clean economy, and shareholder returns.

Solar photovoltaic panel (Photo credit: Adobe Stock/jeson)

Companies that focus their investments on environmentally sustainable activities outperform financially those that lag behind in their environmental commitments, highlighting a link between the clean economy and shareholder returns, a new report has found.

The Carbon Clean 200 report, released by shareholder advocacy group As You Sow and research company Corporate Knights, is a list of 200 publicly-traded companies worldwide that are leading the way among their global peers on the path to a clean economy.

The report reflects how much of a company’s capital expenditure is going towards sustainable activities. Companies are filtered based on a number of criteria, including investments in fossil fuels and pesticides and having caused severe environmental damage through their activities.

Moreover, a so-called ‘tier 4’ emissions criteria has been factored in, which reflects whether a company supports or obstructs progress in energy transition policies.

‘Clean energy’ companies generated a total return of 91.21%, beating the MSCI ACWI broad market index (87.84%) – which covers 85% of global large and mid-cap companies – and MSCI ACWI energy index of fossil fuel companies (61.31%), on Total Return Gross from the Clean200 inception of July 1, 2016, to Jan. 31, 2023.

That means $10,000 invested in the Clean200 on July 1, 2016, would have grown to $19,121 by Jan. 31, 2023, versus $16,131 for the MSCI ACWI/Energy benchmark for fossil fuel companies, the report shows.

Restricting fossil fuels

The outperformance is mainly due to the “continuous divestment from fossil fuel stocks, increased restrictions on new fossil-fuel development projects thus depressing fossil-fuel companies’ growth potential” as well as the “rapid move towards carbon-free energy sources throughout the economy thus putting a premium on stocks of companies providing such solutions,” Matthew Malinsky, research manager at Corporate Knights, told Gas Outlook.

The information technology sector accounted for nearly a quarter of total sustainable revenues at $586 billion, followed by the communications services sector ($542 billion) and the industrials sector ($400 billion).

The top-10 list of the most environmentally-forward companies includes Apple, Deutsche Telekom, Tesla and the Agricultural Bank of China, with only one utility, Spain’s Iberdrola, featured.

Companies based in the U.S., China and Japan are leading the way in sustainable investments.

Other utilities making the 200 list include Denmark’s Orsted, Spain’s Acciona and EDP Renovaveis as well as a number of Brazil-based companies such as Engie Brasil Energia, Centrais Elétricas Brasileiras and Companhia Paranaense de Energia, reflecting the great strides made in the renewable sector in the country.

Brazil is a “huge mineral and renewable economy” while in the U.S., the Inflation Reduction Act is acting as a catalyst for green investments, China is the “emerging gorilla in the sustainable economy space” and “Japan has a long time-culture of energy efficiency,” said Toby Heaps, CEO of Corporate Knights.

Energy majors lagging

While major energy companies such as BP and Total have made progress in their sustainable investments, they didn’t make the list due to the fact these still account for a minority of their capital expenditure.

“As Total and BP are investing more and more towards clean energy sources, these investments may translate into larger contribution of sustainable revenue sources in the future. Currently however, their sustainable revenues are too small to make the Clean 200,” Malinsky said.

Furthermore, utilities in geographies such as France and Germany are still discounting the fact their energy mix is transitioning away from a dominance of coal and natural gas for power generation towards renewables, hence the lower representation in the Clean 200 list, he explained.

Global energy companies have been doubling down on fossil fuels in recent months in a bid to capitalise on the high fossil fuel price environment, raising questions over whether this will further affect their ability to decarbonize their operations.

And while investments in clean energy are gaining momentum, the pace needs to accelerate to meet net zero targets, with the bulk needed in the energy mobility and industrial sectors, which account for 75% of all carbon emissions and 80% of global investment needed to reach net zero, said Ravina Advani, head of energy natural resources and renewables coverage at BNP Paribas.

“Climate change is the existential crisis of our day…Much is happening to exacerbate this crisis, we’ve seen energy being used as a weapon, commodity price volatility, the ramp up of fossil fuels, inflation, supply chain crisis and energy mix reliability issues,” she said.

At the same time “clean energy and EV stocks receded as oil gained traction” over the past year, she said.

Energy transition makes headway

Despite these headwinds, the energy transition is showing continuous progress through increased deployment of renewables as well as CCS, energy storage and hydrogen amid a growing number of countries and companies putting out commitments to net zero by mid-century.

Investments in clean energy must reach US$4 trillion by 2030 if the world is to meet energy demand while successfully transitioning to a low carbon economy, the International Energy Agency (IEA) said in its World Energy Outlook 2022.

Bank financing towards energy investments totalled $1.9 trillion in 2021, with $1 trillion still going towards fossil fuels and $842 billion to low carbon energy projects and companies, according to analysis released on February 28 by Bloomberg New Energy Finance (BNEF).

However to achieve a global warming limit of 1.5 degrees celsius, every dollar invested in fossil fuel supply should be matched with four times as much being invested in low-carbon energy supply in 2030, BNEF said.

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