10 ASX companies dominating this game-changing investment theme

Research by MarketMeter finds that climate risk management is close to the bottom of investment priorities in a sample of 115 institutional investors. This remains relatively unchanged over the past year, despite increased rhetoric by major firms that they are engaging with the opportunities and risks associated with the climate crisis.

Globally, many companies are announcing green products and net-zero emission targets. 73 asset owners (super funds, insurance companies and sovereign wealth funds) with US$10.6 trillion in assets and 273 asset managers with assets of US$61.3 trillion have committed to achieving net-zero investment portfolios by 2050. These commitments include some of the largest investors in the world like BlackRock, Vanguard, and State Street.

Stamping out greenwashing

But regulators and customers alike have increased scrutiny given the relative ease of claiming green credentials, with no real impact on how the underlying portfolios are being managed. 

For example, in the US, the SEC has charged BNY Mellon Investment Adviser for deceptive ESG investment conduct. The SEC has also opened an investigation into some of Goldman Sachs’ ESG funds. In Europe, the emergence of a whistle-blower at Deutsche Bank and accusations of greenwashing led to a police raid and the resignation of their CEO.

In addition to regulator action, the market is also responding to greenwashing concerns, with Morningstar cutting 1,200 funds with EUR1.4 trillion in assets from its European sustainable funds list after a review in February 2022.

Understanding the reasons for these gaps between commitment and action is crucial if markets are to respond to and address climate risks. In 2021 approximately 90 mostly Australian institutional investors and equity analysts were canvassed by MarketMeter¹ to assess how they prioritised a set of 27 corporate performance metrics. 

Climate risk management ranked in the bottom quartile of performance metrics considered by professional investors. The 2022 version of the research, with its sample size of 115 institutional investors, found that climate risk management was still close to the bottom of investment priorities.

These investors gave MarketMeter their unbridled opinion, not a polished corporate message.

It is difficult to truly understand the impacts of ESG metrics in equity research and portfolio construction, but these latest results from MarketMeter seem to indicate that climate risk management is having a negligible impact on which stocks are worth holding and how much should be invested.

Even with the best intentions, it is difficult to change mindset and investment processes when it comes to incorporating climate risk management. It is a very long-dated risk to assess and so doesn’t align with most investment time horizons.

Instead, investors are beginning to view climate as an ‘investment thematic’ - that is, something that has both opportunities and risks. This will lead to more products/portfolios being managed with climate being the most critical factor in determining portfolio composition. 

And given the whole world is attempting to galvanise governments, corporates and investors into making decisions that will contribute positively to solving the climate crisis, I can envisage a high number of products coming to market across all regions. All of them looking to allocate capital to climate-friendly companies. So, the climate thematic subset will grow quickly over the coming years.

"A wave of capital" is coming

Companies that will benefit from this wave of capital are those that have already been articulating a coherent climate strategy, as well as those that have demonstrated a genuine commitment to addressing climate risk. Obviously, sectors and industries will have different risk profiles, but in time all companies will need a strategy because it won’t be enough to say “the climate risk doesn’t affect our business too much because we are a healthcare company, or we are an IT company”. The “climate allocators” will simply ignore them and won’t buy their shares.

According to the MarketMeter data, the top 10 corporates in the ASX100 already addressing climate risk are (in order):

1. Brambles (ASX: BXB)
2. Macquarie (ASX: MQG)
3. Ramsay (ASX: RHC)
4. Xero (ASX: XRO)
5. REA Group (ASX: REA)
6. BHP Group (ASX: BHP)
7. Cleanaway Waste Management (ASX: CWY)
8. Lendlease (ASX: LLC)
9. Telstra (ASX: TLS)
10. Transurban (ASX: TCL)

Interestingly, the top 10 represent diverse sectors and they are not concentrated in “low-risk” sectors such as Healthcare and IT.

Brambles has been the biggest ‘mover’ in the ESG category score and now occupies top spot. The company has gone to great lengths to articulate its “circular business model” and how it is helping to create a “nature-positive economy with re-use, resilience and regeneration at its core”. Brambles’ sustainability strategy will go a long way in ensuring climate related investors regard it as a climate solution.

Macquarie is also perceived to be a leader when it comes to climate risk management. I think it is noteworthy that Macquarie is the top ranked stock across all of MarketMeter’s Management, Strategy, and Engagement scores. Clearly the investment community holds the company in high regard.

Not surprisingly, AGL Energy, Washington H Soul Pattinson, Whitehaven Coal, Aurizon and Orica remain laggards when it comes to managing climate risk.

Interestingly, in the case of AGL Energy (ASX: AGL), WHSP (ASX: SOL), and Aurizon (ASX: AZJ), they are each in the bottom quartile of MarketMeter’s overall scores for Management and Strategy, as well as ESG. The fact that their ESG scores have been trending down is concerning. I expect continued shareholder activism in these companies unless there is an appetite to change their attitude towards ESG matters.

¹MarketMeter is the interactive market insights platform that measures and benchmarks institutional investor perceptions of Australian and New Zealand-listed companies. It is a powerful performance and risk management tool for boards, management and investor relations teams. Corporate subscribers have the power to interrogate this data for meaningful and actionable insights. (VIEW LINK)

In addition to being used by Australia’s super fund industry, MarketMeter’s data is used by the Australasian Investor Relations Association (AIRA) to determine its annual Investor Relations Best Practice Awards. The league tables for the investor relations industry are published on the AIRA website.

MarketMeter’s scoring methodology captures the collective views of institutional investors across ESG, Financial, Management, Strategy and Shareholder Engagement categories of the entire ASX 300.