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  • Gordon Tveito-Duncan

A Year of ESG Investments: GaiaLens Insights from 2023

As we look ahead to 2024, it is clear that Environmental, Social, and Governance (ESG) investments are on the rise. A recent study of over 800 investors found that 56% plan to increase their ESG investments in the upcoming year.

The growing popularity of ESG investing is more than just a passing trend; it reflects a significant shift in investor attitudes. There is a growing recognition that investing in a sustainable future is not only an ethical decision but also a smart financial move. 

This shift towards ESG investments isn't solely driven by investor sentiment. Worldwide, we are seeing the introduction of new ESG regulations. Just last month, the UK's Financial Conduct Authority (FCA) confirmed new sustainability disclosure requirements (SDR) and a fund labelling regime for asset managers, which is set to take effect in 2024. At the same time, the US Securities and Exchange Commission (SEC) has been diligently working to ensure that investors have access to comprehensive, consistent, and comparable climate-related information they need in public filings to make their investment decisions. This means that investors must adapt to a more regulated and transparent landscape, where ESG considerations are not just a matter of choice but a compliance necessity.

Given this growing trend, it would be worthwhile to reflect on the past year's developments so investors can draw lessons to inform their investment strategies for the years ahead. This involves looking at the companies that have been successful with regard to ESG in 2023 and those that have fallen short. 

GaiaLens is a real-time ESG analytics platform designed for institutional investors. It offers a comprehensive set of tools to assist investors in meeting their ESG requirements, including portfolio reporting, investment screening, and in-depth research capabilities.

GaiaLens is a data-centric solution that analyses both structured and unstructured datasets alongside traditional financial data. This ensures the comprehensive collection, consistent measurement, and transparent scoring of ESG-related information across the Environmental, Social, and Governance dimensions for approximately 19,000 companies in real-time, empowering investors to make more informed decisions.

In today's article, we'll take a closer look at the performance of top-performing companies and those facing challenges and the valuable lessons for investors to guide their strategies for the upcoming year. Let's take a closer look at the numbers. 

The Winners of 2023

Let's begin on a positive note by taking a look at the 'winners', so to speak, and examining the top-performing companies in terms of ESG performance. The chart below showcases the leading five companies.

Topping the list with an impressive overall score of 93.11 is Komatsu Ltd. For those who may not be familiar, Komatsu is a global industry leader in the manufacture of construction, mining, and forestry equipment, as well as forklifts and industrial machinery.

Over the years, the Komatsu Group has been proactive in its ESG efforts. They have been committed to assisting their customers in reducing CO2 emissions from their machinery by prioritising environmental performance and integrating ICT solutions to improve fuel efficiency. They have also made substantial Corporate Social Responsibility contributions. For instance, in Japan, they offer support to the struggling agricultural sector, which is grappling with issues such as an ageing workforce and a lack of newcomers, by leveraging their manufacturing expertise.

As a result of their dedication, the company has earned a solid reputation and has been honoured with prestigious double 'A' ratings for global climate and water stewardship. This makes Komatsu a very attractive option for investors interested in ESG-focused investments.

Another standout is Rexford Industrial Realty, Inc., which emerged as the biggest gainer of 2023. Rexford Industrial Realty, Inc. is a leading industrial real estate firm in Southern California, specialising in acquiring, developing, leasing, and managing industrial real estate properties.

Rexford Industrial Realty is dedicated to repurposing and revitalising vintage, functionally- and energy-inefficient buildings into high-value, highly functional properties that meet rigorous green standards. This approach not only delivers financial returns but also generates substantial environmental benefits. Meanwhile, their purpose-driven business model contributes to the transformation of local communities, promoting job growth, community safety, welfare, and increased local tax revenue, thereby creating meaningful societal value.

Their score saw a significant increase in October when they announced the validation of their emissions reduction targets by the Science Based Targets initiative (SBTi), reaffirming the company's commitment to generating value through a comprehensive ESG approach. ESG represents a holistic approach that quantifies the positive environmental, societal, and governance impact Rexford Industrial's unique, value-driven business model has had.

Their strong ESG performance combined with their solid financial foundation, strong balance sheet, and growth potential, Rexford Industrial Realty emerges as a promising investment option.

Alphabet Inc., the parent company of Google, also had a successful year, having the most net positive sentiment articles within our coverage. Their commitment to sustainability has been evident over the years. In August 2020, Alphabet issued the largest sustainability bond ever recorded, raising $5.75 billion to support various sustainability initiatives. What's more, Google has been working on improving the efficiency of its data centres for over a decade, focusing on energy, water, and material optimisation. Their recent efforts in cooling technology aim to reduce water usage in data centres and minimise their environmental impact on local communities. This proactive, forward-thinking strategy has earned them lots of positive publicity. 

The Losers of 2023

Now, let's turn our attention to the bottom five performing companies. Sitting at the very bottom is National Metal Manufacturing and Casting Co., a Saudi Joint Stock Company specialising in manufacturing metal engineering products and services. It holds an overall score of 7.899.

However, the most significant decline of 2023 belongs to Equitrans Midstream Corporation (ETRN). Equitrans Midstream Corporation is a prominent independent midstream company in North America that provides natural gas transmission, storage, and distribution services. Unfortunately, it has experienced a substantial decline over the past year, as indicated in the graph below.

Several factors have contributed to this notable decline. ETRN serves as the operator and majority owner of the Mountain Valley Pipeline (MVP), a 303-mile natural gas pipeline project initially proposed in 2014, approved by the FERC in 2017, and began construction in 2018. Initially projected to cost $3.5 billion and be completed in early 2019, the project has faced significant setbacks. It is now more than four years behind schedule and $3.1 billion over budget.

This delay and cost overrun can be attributed to ongoing litigation and regulatory challenges. Environmental and local groups have engaged in legal disputes, contending that the project would harm soil and water quality in the forest and contribute to increased natural gas usage, a significant source of greenhouse gas emissions.

This situation underscores the complex and contentious nature of energy infrastructure projects in today's regulatory landscape.

Whereas Alphabet had the most positive news stories, Shell plc faced a higher degree of controversy this year, with a total count of 482 negative articles. This might not come as a complete surprise, as their actions and policies have been subject to intense scrutiny, particularly concerning the environment, resulting in a notable amount of negative publicity. 

For instance, earlier this year, Shell and a dozen other oil companies, including BP, faced allegations of engaging in greenwashing practices regarding their renewable and low-carbon energy production levels. These allegations emerged following a comprehensive study commissioned by Greenpeace, which examined the annual reports of British fossil fuel giants for 2022, along with ten other European companies. The study juxtaposed the amount of renewable electricity generated by these companies (including wind, solar, geothermal, and hydro sources) with the energy derived from their own oil and gas production. In 2022, Shell's renewable energy output stood at just 0.02%. Furthermore, their investments in green energy were dwarfed by their investments in fossil fuels, with a staggering 91% of Shell's investments directed toward fossil fuel projects throughout the year.

Arguably, the biggest loser of 2023, however, is Johnson & Johnson, which had the biggest fine this year, totalling $9,246,663,300. This penalty stemmed from concerns that the talc used in its well-known Baby Powder and other products might have been associated with cancer cases.

The Lessons Learned in 2023

It is clear that ESG investments are gaining momentum. To prepare for the future, investors can learn from the experiences of 2023. Successful companies like Komatsu Ltd., Rexford Industrial Realty, Inc., and Alphabet Inc. have demonstrated the benefits of ESG commitments. Meanwhile, companies facing difficulties, like Equitrans Midstream Corporation and Shell plc, illustrate the challenges in various industries.

As we move forward, investors should consider ESG not just for ethical reasons or compliance but because it makes financial sense. These lessons offer guidance on responsible and sustainable investing, helping investors make informed choices that benefit their portfolios, the environment, and society. Staying informed and adaptable in this evolving ESG landscape will be crucial for successful investing in the years ahead.

As we enter a new year, the ESG investment landscape shows promising growth. If you're curious about the insights from 2023 and want to learn more, visit our website, and request a demo of GaiaLens. It's your chance to improve your investment strategies for a sustainable future.

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