Top Stocks Special Edition - Ethical, Sustainable, Responsible: A Sharebuyer's Guide to ESG for Leading Australian Companies

By Erica Hall

A handbook for investing with impact and building a share portfolio that reflects your values

When it comes to share investing, how you choose to invest your money can create real global impact. Your investments can make a difference for urgent issues like climate change and human rights. But how do you know which companies are living up to their promises for a greener, brighter future? In Top Stocks Special Edition – Ethical, Sustainable, Responsible, you’ll discover essential information for growing a profitable portfolio that aligns your investments with your values.

This book reveals the ethical and sustainable impact of top Australian companies. Inside, sustainable investing expert Erica Hall provides clear explanations for key metrics on environmental, social and governance (ESG) criteria and on carbon emissions. With this book, you’ll learn how to evaluate risk and momentum for more than 60 best-in-class companies across the major industry sectors of the ASX. And you’ll discover which companies have strong accountability, a clear pathway to decarbonisation, and robust, transparent ESG reporting.

• Learn how to identify what companies are best-in-class for responsible and ethical investing
• Understand the different challenges faced by each sector in achieving goals for impact
• Explore current issues in ESG and sustainability, from business ethics to public policy, the supply chain, environmental operations, and more

An invaluable resource for novices and professionals alike, Top Stocks Special Edition – Ethical, Sustainable, Responsible provides clear, accessible tables for easy reference to essential ESG ratings and data points. With this handbook, you’ll learn how and where your investments can make a positive difference in the world — so you can make wiser, well-informed decisions for building your wealth.

• Language: English
• Publisher: Wiley
• Release date: Apr 25, 2024
• ISBN: 9781394243488

Book preview

DEFINITIONS

PART I

THE COMPANIES

1.

Basic materials

This sector comprises companies that are involved in utilising natural resources and commodities through extraction/mining, refining and processing materials. These metals and minerals and other essential commodities are important in the development of essential goods and services required for a transition to a low-carbon economy.

Basic materials can cover the following activities:

exploration, production and distribution of energy resources, such as natural gas, and fossil fuels, such as oil and coal

mining of minerals and metals, including gold, copper and ores

manufacturing and distribution of chemicals and chemical products

logging and manufacturing of materials from forestry, such as paper manufacturing

production of construction materials, including steel, cement and bricks.

On the face of it, this sector may not look like a good fit for a responsible investing portfolio; however, lithium mining provides just one example of an essential component in the race to decarbonisation and the electrification of everything. Lithium is used in batteries required to run electric vehicles as well as battery storage for renewable energy sources and other consumer electronics such as smartphones, laptops and digital cameras. It is also used in medical devices, and in aircraft and satellites. Australia is one of the world's leading lithium producers and demand for lithium is expected to remain elevated given its contribution to the clean energy transition. This is an example of how nuanced responsible investing can be. There are trade-offs that have to be considered.

The demand for materials to support decarbonisation goes beyond lithium to include copper, nickel, chromium, zinc and other rare earth minerals. Wind turbines, solar panels, electric vehicles, batteries, energy storage, and carbon capture and storage are all examples of products that need inputs from minerals mining.

The biggest beneficiaries of the nineteenth-century gold rushes were the people selling mining equipment, from shovels to shoes. Sustainable investors should consider seeking out companies that are providing inputs into the net zero transition, such as mining of lithium and cobalt for batteries, and copper and aluminium for wind turbines.

Australia's largest company by market capitalisation, BHP, sits within this sector, as do other household names such as Rio Tinto, Fortescue Metals, Oz Minerals and Iluka Resources. Not surprisingly, given that we are a resource-rich nation and exporter of commodities, the basic materials sector has historically been a significant component of the ASX.

Some companies operating in this sector are taking significant steps to improve their environmental impact. They are looking to reduce their carbon footprint by being more energy efficient, using renewable energy, and investing in new and emerging technologies such as green hydrogen and ammonia in an attempt to minimise environmental impacts. However, steel production is hard to abate as it is energy intensive, and achieving a forward-looking net zero goal requires the commercial success of emissions-reducing emerging technologies.

Responsible miners need to minimise the destruction of wildlife habitats, reduce deforestation impacts and switch to chemicals that are less environmentally harmful than those traditionally used. As local regulation improves, reporting of climate-related impacts will become mandatory.

The other component is ensuring companies have a social licence to operate by taking into account all stakeholders and engaging with them to ensure alignment with ESG standards.

Unfortunately, some companies with solid ESG ratings have had to be excluded due to a lack of comprehensive data, while Newcrest Mining was excluded due to its takeover by US-headquartered Newmont Corporation.

BHP Group Limited

History/background

BHP is a diversified natural resources company focused predominantly on mining and metals. Founded in 1885 as the Broken Hill Proprietary Company, it is now the largest stock on the ASX as measured by market capitalisation. Headquartered in Melbourne, it is a global company with operations in many countries. BHP is one of the world's largest iron ore producers and is also involved in copper production.

Historically, it has been a big player in oil and gas exploration and production, which precluded it from being included in responsible investment portfolios. Recently BHP made a strategic decision to divest fossil fuel assets from many of its oil and gas assets, which were acquired by Woodside Petroleum in a deal worth approximately AU$40 billion. BHP made the decision to divest as it transitions its business towards low carbon. The company sought to sell its high-polluting Mt Arthur thermal coal mine in NSW, which is due to be decommissioned in 2030, but ended up holding onto it as the costs of regenerating the site to its former condition (a legal requirement) was estimated at US$700 million, which likely reduced buyer interest. In October 2023 BHP flagged the potential to convert the site to pumped hydro or solar farming.

Continuing with its fossil fuel divestment, BHP has also recently announced it will sell its Queensland-based Blackwater and Daunia metallurgical coal mines, in which it has a 50 per cent share, to Whitehaven Coal. However, this plan is controversial since it does nothing to reduce GHG emissions. Activists prefer mine closures and regeneration of sites over divestment through sales or, as a minimum, the sales process should require purchasers to adhere to Paris-aligned climate commitments to help with future GHG reductions.

ESG performance

BHP is an example of a company that may not look compelling at face value but is making a commitment to transform its business by prioritising sustainability, particularly seeking to improve environmental impacts within its operations. The data shows positive momentum in reducing ESG risks. BHP's goal is to achieve net zero emissions for scopes 1 and 2 by 2050, which may include some use of carbon credits. It defines its goal as ‘to seek an outcome for which there is no current pathway’. It has an interim target of reducing operational GHG emissions by at least 30 per cent by FY30 from an FY20 baseline. A target is defined as ‘an intended outcome … subject to certain assumptions or conditions’. Scope 3 ambitions are less definitive. They pursue the goal of net zero scope 3 by 2050 but outcomes are uncertain. Rather, by FY50 they target net zero GHG from shipping and net zero operational GHG emissions from their direct suppliers. By FY30 they aim to reduce GHG emissions intensity by 30 per cent in their steel making through investing in new technologies to reduce GHG emissions, particularly in its high carbon emitting businesses. The significant divestment from several fossil fuel assets is a clear commitment to decarbonisation. As a result, it is drawing the interest of a number of sustainable investors seeking to invest in companies that generate 5 per cent or less revenue from fossil fuel involvement. Before divestment BHP generated between 10 per cent and 24.9 per cent of its revenue from fossil fuel