The biggest company in the world signed the biggest corporate procurement deal earlier this year: in February 2015, Apple said it would invest $848 million to procure solar energy over a 25-year period. Google and Amazon are also ramping up the use of renewable energy, as are a host of other large and small companies, nudged by regulation, economic rationale or in response to user demand.
Meanwhile, many energy companies have caved in to shareholder resolutions demanding disclosure and action. Large oil companies such as BP and Royal Dutch Shell endorsed shareholder resolutions earlier this year that committed them to disclose their support for low-carbon activities and preparedness for long-term challenges facing the fossil-fuel industry.
Pressure is clearly building on companies not only to control their emissions but also to be more efficient in their energy use, increase renewable energy usage, be smart about water use, be fair to employees, be responsive and have a gender-balanced and diverse board and organisation, besides making money for shareholders. Facebook, for instance, received considerable flak for having an all-male board until Chief Operating Officer Sheryl Sandberg was given a seat.
Companies need to fulfil environmental, social and governance (ESG) parameters to qualify as sustainable. Large institutional investors are incorporating ESG data in investment decisions. The Principles for Responsible Investment (PRI), for instance, has 1,325 signatories representing some $45 trillion of assets under management that are committed to this. The PRI is supported by the United Nations.
There are a host of organisations working on sustainability accounting, integrated reporting and carbon disclosure, which could soon find their way into listing agreements of stock exchanges. The Sustainable Stock Exchanges Initiative is aimed at enhancing ESG reporting by listed companies.
The Securities and Exchange Board of India has mandated the inclusion of business responsibility reports, disclosing ESG performance, in the annual reports of the top 100 listed entities. It has also imposed a quota of one female director on the board of every firm, a requirement that many companies failed to meet by the deadline of March 31, 2015.
The movement for divestment from fossil-fuel assets such as coal has also picked up momentum in university campuses, and in some other unexpected places. Divestment activists liken their movement to the anti-apartheid or the anti-tobacco movement. Earlier this month, the Church of England said that it would dump its holdings in coal and oil-sand producers, and desist from investing in the most polluting fossil fuels. The Church joins about 200 institutions, including Stanford University, Oxford University and Glasgow University, in scaling back investments from polluting industries.
Norway's $900 billion-sovereign wealth fund - the world's largest - has already divested most of its holdings in pure coal producers even as it accelerates investment in green sectors.
"It's moving from being an ethical issue to being framed much more as an investment risk," said Gregory Elders, a London-based analyst at Bloomberg Intelligence, who follows ESG issues.
A wholesale exit from fossil fuel is not practical. In a white paper released in August 2014, Bloomberg New Energy Finance estimated the stock market value of oil, gas and coal companies at nearly $5 trillion. There are no other sectors that can absorb this investment and offer similar liquidity, value growth and dividend yield.
The expectation is that some of the most polluting fuels, and the most expensive reserves, are likely to stay in the ground or under the sea, or, in other words, be stranded. The scale of these stranded assets is debatable but there will be some for sure. The question then is how best to prepare for that eventuality. Norway's sovereign wealth fund is working on an option: ring-fencing the assets in a separate unit.
Norges Bank Investment Management - the manager of Norway's sovereign fund - wrote to the biggest miners and raised the question of spinning off coal mining. It said: "...coal divestment strategies are being supported by a growing constituency of investors. We now regard it as possible that such systematic divestment programmes may introduce a 'coal discount' within the mining sector... We would welcome your board's consideration on divestment of coal assets."
To utilities, it said: "...we seek increased transparency on your strategy and timeline to phase coal out of your fuel mix for power production."
Vandana Gombar is editor - global policy for Bloomberg New Energy Finance
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
