Bridgewater: The Complexity of Assessing Corporate Decarbonization

Assessing the credibility of carbon transition targets is multidimensional and complex. Investors should beware of traps such as being “too ambitious on [carbon] metrics” into their portfolios at the expense of helping change the real world by engaging with large emitters, said Carsten Stendevad, co-director of sustainability investments at Bridgewater Associates.

“Too much focus on your own portfolio and not enough on the real world in terms of goal setting is very dangerous,” Stendevad said, in a discussion of the role of investors in the transition to a low-carbon economy. at Conexus Financial’s Sustainability in Practice Forum at Harvard University.

Industries such as metals and mining are unsustainable in their current practices and are essential to reducing emissions because they produce the zinc and copper needed for solar panels and electric vehicles, he said, during from a conversation with Amanda White, Director of Institutional Content at Conexus Financial. .

Investors should consider the impact and potential future impact of the carbon transition on individual companies or countries, not only to determine the potential risk to their portfolios, but also with the aim of proactively deploying capital in a way fund the transition, says Stendevad.

“It is essential to be able to understand at the security level, which company is, so to speak, part of the solution and which companies are part of the problem.”

Stendevad presented statistics showing that the most carbon-intensive 30% of global market capitalization accounts for 90% of corporate emissions and 60% of all emissions. The top 20 emitters account for about 20% of global corporate emissions, he said.

Identifying these weak points is relevant because these industries are sensitive to political shocks and direct environmental shocks. These are also the companies that will need financing the most to change.

“They are also the ones who need funding the most, they are the ones who need the most change,” Stendevad said. “They are really central to the transition story.”

Problematically, when looking at the scientific targets announced by the companies, the total emissions do not change much in his projections, because most companies with ambitious targets tend to belong to sectors other than those mentioned above. -above.

“It’s wonderful if a pharmaceutical company hits net zero…but it’s not the most critical thing for the world in terms of hitting net zero,” Stendevad said.

500 top transmitters

Most critical is the action of the top 500 issuers, “who by and large don’t really have any concrete plans,” Stendevad said.

Investors can look at three types of companies that are part of the solution, which he called leaders, enablers and enhancers.

“Leaders” are not part of the problem, and can either be “born from light emissions” or have successfully transitioned. “Enablers” are companies that are essential to other companies making the transition, such as green technology companies and others that provide solutions to facilitate the transition.

But these are the “enhancers” that Bridgewater is particularly focused on, as they are entities that are currently unsustainable. A key question is whether they are on the way to becoming sustainable. Many companies in this category will not turn out to be truly ameliorative, he said.

“This group of companies is very tricky because…you can’t just sit back and assume everyone is going to figure it out,” Stendevad said.

The challenge for asset owners is to credibly identify those who will turn out to be enhancers. Investors also have to deal with the potential impact on their own image and carbon metrics by getting involved with those companies that “don’t look good today.”

“So that forces you to look at businesses that are not sustainable today,” Stendevad said. “It can even hurt your portfolio metrics, carbon metrics and the like, but if you care about actual results, those are the most important for the transition.”

This leads to the pitfall of “being almost too ambitious on metrics, like in my portfolio, I want to have perfect emissions metrics by next year.”

An ongoing research effort by Bridgewater over the past five years has involved building a systemic assessment of sustainability at the corporate level. It examines where businesses are today and where they are likely to be in the future.

Assessing the credibility of improvement plans is essential. Is there a proven way for this company to reduce its emissions?

“If there’s a proven technical way to do it, but it just hasn’t been done yet, that of course makes a plan more credible,” Stendevad said. “If this is indeed unproven technology that we hope will arrive in 2040 and we will wait until it does, that makes a plan less credible.”

Credibility

Other questions to ask when assessing credibility include examining the cost-effectiveness of this reduction plan and specifying the targets.

It is also important to see if this is reflected in the company’s strategy. “When you actually hear CEOs talking to investors, is that central to what the company actually does and talks about to the markets?”

Also, is it reflected in how companies spend their money? Is it aligned with the company’s financial strategy?

Assessing the automotive sector, for example, is relatively easy because “what needs to be done is pretty clear”. Electric vehicle technology is already proven and this transition is realistic, he said.

Conversely, metals and mining is “a much more multidimensional and complex industry to value” because its products are essential for electric vehicles, solar panels and other technologies that are part of the solution, but its current practices are not sustainable.

An ongoing challenge is managing the ambiguity and imprecision inherent in forward-looking assessments, he said.

Some companies may do everything they can to make the transition and not succeed, while others “will legitimately say that we just don’t know how we’re going to make the transition.”

“We think we’ve had enough [information] start directing capital in this way. We try to be very humble but [we have] enough to make relative assessments of who is on track and who is not.

Sharon D. Cole