Environment – The Elephant in the ESG Room

The ‘E’ in ESG that stands for environment is, perhaps, its most well-known factor. There is a fair amount of awareness among the general population about the impact of a company or an industry’s operations, products and services on the environment. This makes this factor the most looked at and talked about part of ESG globally.

TL;DR

• Availability of environment impact data at company level still not perfect
• Several agencies, non-profits and research institutes track the impact of human activities on the environment
• Investors look at factors such as use of fossil fuels, pollution, deforestation, waste creation and resource utilization

Talking numbers

While there is also a fair amount of data and structured information available on the impact of human activities on the environment, availability of company level information is still not perfect.

Understanding with examples

We all know that fossil fuels pollute and contribute to the rising levels of carbon dioxide in the atmosphere. Higher levels of carbon dioxide lock in more heat and cause increases in average global temperatures or ‘global warming’. This climate change leads to rising sea levels and a higher number of weather events such as hurricanes, floods, etc.

Therefore, companies that mine and sell fossil fuels, buy and burn fossil fuels, or manufacture products that use fossil fuels contribute to global warming. Not only does global warming have far reaching implications on the future of humanity, it also poses risks for the long-term sustainability of such businesses. Consequently, such companies will have a very high environment related risk score.

Tracking climate change

There are several organizations, non-profits and research institutes that track climate change.

• The UN Intergovernmental Panel on Climate Change was set up by the World Meteorological Organization and the United Nations Environment Program in 1988 to provide an objective source of scientific information.
• United Nation’s Earth Summit set up the United Nation’s Framework Convention on Climate Change in 1992 towards addressing the climate change problem.
• The Kyoto Protocol with legally binding emission reduction targets on developed countries party to the protocol was adopted in 1997.
• The Paris agreement was signed by 175 world leaders in 2016 towards limiting the rise in temperatures well below 2 degree Celsius above pre-industrial levels.

Through the investors’ eyes

There are a number of environment related issues that investors look at as a part of their assessment of companies. Some of these are related to usage of fossil fuels, pollution, deforestation, waste creation, use of non-biodegradable plastic, climate change and resource utilization.