European companies that use coal as an alternative to Russian gas risk having their environmental, social, and governance ratings lowered, leaving them scurrying to persuade investors who are still concerned about sustainability.
Despite an energy crisis caused by Russian sanctions, leading European investors say they will not abandon their investing principles of achieving net zero carbon gas emissions by 2050 or earlier.
Investors are increasingly using ESG ratings established by businesses such as MSCI or Sustainalytics to assess the qualities of companies. Companies get a bad rap for burning coal, which emits more CO2 than alternatives like oil and gas.
Despite the fact that the Ukraine situation has limited Russian gas supply, European countries such as Germany and Italy are considering reintroducing coal. Some corporations, such as Lanxess (LXSG.DE), a German specialty chemicals company, have also stated that they may consume more coal. more info
Companies obliged to use the fuel due to pricing pressures or national policy might make up ground by finding alternative ways to burnish their environmental credentials, or by focusing on the S and G in ESG, according to industry sources.
“When your emissions go up, all other things being equal, you are in more trouble from a ratings perspective,” said Sylvain Vanston, MSCI’s executive director of climate change investment research. “If you come up with a fantastic new commitment, that could counterbalance it.”
However, few industries have found a silver bullet to combat the usage of the highly polluting fuel. Lanxess, which has already acknowledged the impact on its carbon footprint, declined to comment on the potential impact of burning additional coal on its ESG rating.
It has, however, stated that if it prices itself out of the market, it may result in plant closures and job losses, which may have an impact on the “social” side of its business.
Companies who want to maintain their ratings have other options. According to David McNeil, head of climate risk at Sustainable Fitch, the agency considers a company’s whole ESG effect when evaluating it. “If a power utility is issuing a green bond, that is something we would look at,” he said.
Some corporations, such as the Italian utility Enel (ENEI.MI), have issued bonds that are related to their overall sustainability performance.
However, sustainability-linked bonds and green bonds, which fund specific environmental initiatives, have done poorly in recent months as the possibility of increased interest rates and a possible recession has hammered corporate debt markets in general.
RWE (RWEG.DE), Germany’s largest power producer, previously issued green bonds after its CEO stated last month that Germany needs to preserve gas in its power industry by substituting it with coal.
According to a RWE spokesperson, the company is still focused on boosting its usage of renewable energies and hydrogen in order to accelerate the coal phase-out, a policy that has received “broad approval” from its investors.
Other companies, such as Europe’s largest copper smelter Aurubis (NAFG.DE), have stated that their goal of decarbonization remains unchanged, despite the additional short-term complication of adding coal in the energy mix.
Investors insist that they are equally committed. Despite the Ukraine conflict, AXA Investment Managers, Allianz Global Investors, and Zurich Insurance, which collectively oversee $1.8 trillion in assets, all stated that they would stick to their coal-cutting plans.
“We are not changing our position and we are not changing our policy – we are sticking to the course,” said Zurich group head of sustainability Linda Freiner.
So far, Europe’s energy crisis shows no signs of abating. It remains to be seen how far corporations or investors can maintain faith in long-term ESG ideals like eliminating coal if the situation worsens.
“Coal throws up an energy security question that in the short term is in conflict with the decarbonisation problem,” said Alex Simcox, head of ESG investment at asset management Mondrian.
“If you are in Germany and Russia cuts off gas, even if you are in the Green party, you should accept that the extension of coal-fired power is a pragmatic answer.”