How to avoid polluting stocks

By Josh Gregory, CEO and Founder of Sugi 

BP, Shell… we all raise an eyebrow when polluted companies claim to have ‘gone green’. Sure, the marketing spiel looks convincing, but if public scandals have taught us anything, it’s to be cynical.

Many investors hold such stocks, either directly or through funds. Those who want their investments to have a positive impact and to align with their values, might be concerned. Is it better to ditch the polluting stocks, or hang on to them?

While I’m not in the business of giving trading advice, I created Sugi to help retail investors filter the greenwashers from the game-changers. Here’s what to consider when avoiding polluting stocks.

1. It’s not just about low carbon sectors

Some industries are inherently polluting (e.g. oil and gas, mining, agriculture, shipping). However, the attitudes and activities of companies within these industries vary widely. Some are notable for their failure to acknowledge the environmental problems they cause (e.g. the shipping sector), while others are dedicating significant resources to adjusting their business models and ways of working for a more sustainable future. Most are somewhere in between.

This is known as the ‘transition debate’ and is particularly significant for investors. Until recently, if investors wanted to engage in green investing, they might only focus on low carbon sectors, such as technology, financial services and renewable energy. While these companies are no doubt important and have their place in a green portfolio, attention has recently turned to ‘brown companies’ – those which are traditionally polluting, but taking steps to become greener.

Arguably, supporting and financing the transition of brown companies away from polluting activities is as important in combatting climate change.

2. Assess the company’s impact

Researching new investments can involve a bit of detective work. While ESG ratings are important, they aren’t targeted at everyday investors who want to know what a company is currently doing to reduce their environmental footprint. The best source of information for this is via a company impact report or similar information included on the company’s website. However, given this is produced internally, many would rightly question the reliability of such information.

3. Question everything

When it comes to impact reporting, question everything. Ask yourself, ‘what is the company actually doing?’

In company reports, a good place to start is to check whether the company is reporting on issues that are important for its sector, or if it’s just focusing on corporate social responsibility generally, e.g. social projects and charity. Examples of issues include:

• An energy company switching to renewable energy sources, investing in renewables infrastructure and reducing the environmental footprint of its existing operations
• Mining companies focusing on the responsible and sustainable extraction and processing of minerals and metals (including those such as lithium, graphite and nickel which are used in low-carbon technologies)
• Agriculture businesses investing in low carbon transport and sustainable land management
• Chemical companies reducing their waste and demonstrating successful waste management practises that protect the environment

It’s important to differentiate between intention and action. Ultimately, it’s what a company does in real terms – not what it promises – that matters. Be sure to check the numbers too – for example, leading oil and gas companies are spending on average only 5% of total capex on projects outside core oil and gas supply, according to the International Energy Agency. Much more is needed to see a real energy transition.

4. Don’t forget the 1.5ºC target!

International consensus is now that the global average temperature increase must not exceed 1.5ºC above pre-industrial levels to prevent devastating consequences for vulnerable countries.

Increasingly, whether a company’s activities align with 1.5ºC target is a measure of that company’s green credentials. Perhaps this is an artificial construct. After all, it’s hard to ascertain whether a country’s activity aligns with the target, let alone an individual company’s. But if a company can demonstrate that its activities are aligned with the target, it’s an encouraging sign.

5. Check how the company measures its carbon impact

Some companies don’t release data on their emissions, which could be a red flag. However, even when the data is provided, certain emissions may be hidden.

Carbon emissions fall within three ‘scopes’. Scope 1 covers direct emissions from owned or controlled sources. Scope 2 covers indirect emissions from the generation of purchased electricity, heating and cooling consumed by the company. Scope 3 includes all the other indirect emissions that occur in a company’s value chain (from suppliers to end users), such as raw material processing, product transportation and consumer use.

Quite often a company omits its scope 3 emissions from its carbon data, which distorts the picture. For example, a mining company that was engaged in sustainable extraction and used renewable energy throughout its business would appear to have low carbon emissions based on Scopes 1 and 2. If that company mined coal, however, the extracted coal would be prepared using a highly polluting process, shipped around the world and burned by end-users, as coal is designed to be; it would be indirectly responsible for significant Scope 3 carbon emissions. To exclude Scope 3 and describe the company as ‘green’ would be misleading.

In the end, there’s no clear answer about what to do with polluting stocks. Retail investors can simply do their best in murky waters. With the current focus on green investing, expect to see many more publicly listed companies trying to woo investors with their green credentials. Let’s hope they make a real difference.

We created Sugi to bring some clarity to green investing. For the first time, retail investors can access personalised carbon data about the stocks, funds and ETFs they hold and compare them with industry averages and similar investments. Users link their investment portfolios through Open Finance technology, which enables us to personalise the experience and information. Behind the scenes, the raw impact data is sourced from S&P Trucost, a world leader in environmental data and analysis with the world’s largest impact data set and over 100 environmental key performance indicators.

Through Sugi, retail investors have access to relevant, objective and easy-to-understand green information, making it much easier to engage with green investing.