After a slow start, the race has begun as Australian companies seek to reduce their carbon footprint and work towards a nationwide goal of reaching net zero emissions by 2050. While the result is important, the focus is also on how companies are going to get there.

For some, the pathway is orderly and achievable, while other “hard to abate” sectors, such as mining, are challenged in their reliance on new technologies and large capital expenditure. 

All companies are being cajoled along by shareholders, debt providers, supply chain participants and customers [to reduce their carbon footprint]. Today, they are held to account for their climate action plans, net zero commitments and interim targets. Non-compliance can lead to boards being replaced, debt providers withholding capital, supply chain deals souring, penalties or higher taxation, and even the loss of customers.

So, with investors now finding themselves spoiled for choice, how do you choose between investing in the good, the bad and the truly sustainable?
 

Focus on credible carbon reduction plans

First, look for companies that are setting firm, tangible – and perhaps most importantly – credible carbon reduction plans. 

One approach, which has been taken by 83 Australian companies and more than 5,000 firms globally, is to become a signatory to the Science Based Target initiative (SBTi); an initiative to help companies define their path to reduce emissions in line with the Paris agreement goals. 

Rigorous review and validation processes apply to these companies in setting their near-term targets (5-10 years), actions required for achievement as well as long-term targets (for achievement no later than 2050).

[Editor’s Note: Do not read the following analysis as a recommendation to invest in companies mentioned. This analysis only considers some aspects of a company’s sustainability strategy. Many factors affect whether to invest in a company, of which sustainability is one. Moreover, as companies invest more to reduce their carbon footprint, the trade-off could be slower earnings growth, in some cases.]

Other Australian companies have decided against spending the money to get them registered with SBTi yet still have sustainability targets and frameworks in place. Examples of other decarbonisation efforts taking place in Australian companies include:

• Property developer Mirvac Group (ASX: MGR) has already achieved net zero carbon and is working towards being net positive carbon, reducing its embodied carbon and building 5.5-star NABER rated energy efficient buildings.
  
  
• Coles Group (ASX: COL) and Woolworths Group (ASX: WOW) are due to be fully powered by 100% renewable electricity by 2025, as they aggressively seek to reduce their greenhouse gas (GHG) emissions. Coles is targeting 75% by 2030 and reaching net zero by 2050, while Woolworths seeks to be net positive carbon emissions by 2050.
  
  
• Banks, such as Bank Australia, are not lending to fossil fuel companies and are ambitiously committed to achieving net zero emissions across their operations, lending and investment portfolios by 2035. Similarly, Bendigo and Adelaide Bank (ASX: BEN) has a 95% reduction target by 2040 for all financed emissions.

Penalties can apply to laggards

Second, be aware that Federal Government policy will play an increasing role and is moving towards penalties, forcing heavy carbon emitters to make cuts of nearly 5% each year to their emissions and not just look to make offsets. 

Federal government law regulates the emissions of Australia’s 215 largest polluting facilities, including fossil fuel companies, large mining firms and chemical businesses, which collectively contribute almost 30% of Australia’s total emissions. This is one of the action items required for Australia to achieve the government’s commitment of 43% reduction in carbon emissions by 2030 compared with 2005 levels.
 

Debt holders have a role to play

Third, while equity holders have voting rights, debt holders can withhold capital when they feel that a company isn’t making the grade and risks falling from the good or the sustainable into the bad. Failing to decarbonise represents a material Environmental, Social and Governance (ESG) risk that can ultimately affect the credit profile of a company and the price of its shares or bonds. 

For companies that are laggards in this area, debt investors can actively engage with companies about areas for improvement, which may include the setting of interim and long-term net zero targets, implementing credible action plans, and transparency in reporting their progress. 

Where noncompliance exists, debt investors have the option of escalation to board level, or ultimately, to no longer offer funding to the company. 
 

Investing in leaders

So, with all that in mind, what does Janus Henderson look for in truly sustainable companies? We seek out companies with robust sustainable practices, and with the potential to enhance outcomes for society’s wellbeing and protection of the planet. Janus Henderson’s holistic framework looks for those companies on the right side of 

• Decarbonisation
• Environmental biodiversity
• Sustainable buildings
• Circular economy
• Social equality and poverty
• Inclusion and social diversity
• Disability support and services, and
• Affordable housing.

Funding to these types of companies can be in the structure of many different types of debt instruments, including in the form of a labelled bonds. This includes:

• Green bonds where the capital raised from the bond is directly used to fund projects assisting the decarbonisation efforts of the firm.
  
  
• Sustainability bonds in which the funds are used to finance a pool of “green” assets.
  
  
• Sustainability linked bonds (SLBs) where the coupons paid to the investor are linked to the issuer’s achievement of certain climate-related targets.
   

What does this mean for investors?

Collaborative efforts from stakeholders will greatly assist in addressing the issues of climate risk and creating more sustainable companies. Janus Henderson believes that alleviating material ESG risks in the companies in which we invest is likely to result in better risk-adjusted returns for investors. In doing so, Janus Henderson hopes to avoid the bad, and instead focus on investing in those companies that truly are good for our investors and sustainable for the planet.

DISCLAIMER

This information is issued by Janus Henderson Investors (Australia) Funds Management Limited (AFSL 444268, ABN 43 164 177 244) ("Janus Henderson"). The information herein shall not in any way constitute advice or an invitation to invest. It is solely for information purposes and subject to change without notice. This information does not purport to be a comprehensive statement or description of any markets or securities referred to within. Any references to individual securities do not constitute a securities recommendation. Past performance is not indicative of future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

Whilst Janus Henderson believes that the information is correct at the date of this document, no warranty or representation is given to this effect and no responsibility can be accepted by Janus Henderson to any end users for any action taken on the basis of this information. All opinions and estimates in this information are subject to change without notice and are the views of the author at the time of publication. Janus Henderson is not under any obligation to update this information to the extent that it is or becomes out of date or incorrect.