Return of coal a threat to European companies’ ESG ratings

An aerial view exhibits coal at a dry bulk terminal of German Rheinberg-Orsoy harbor alongside Europe’s most vital transport means Rhine in Rheinberg close to Duisburg, Germany, April 6, 2022. Image taken with a drone. REUTERS/Stephane Nitschke

LONDON/FRANKFURT, July 26 (Reuters) – European firms turning to coal as an alternative choice to Russian fuel face a success to their environmental, social and governance scores, leaving them scrambling to impress buyers nonetheless vocal on sustainability.

Regardless of an power disaster following sanctions on Russia, main European buyers say they won’t chill out their funding rules of reaching web zero targets on greenhouse fuel emissions by 2050 or earlier.

Buyers more and more use ESG scores, developed by firms reminiscent of MSCI or Sustainalytics, to guage corporations’ deserves. Burning coal, which places out extra carbon dioxide than alternate options like oil and fuel, provides firms a black mark.

European nations together with Germany and Italy are nonetheless contemplating bringing again coal because of the Ukraine disaster, which has lower Russian fuel flows. Some firms, reminiscent of German speciality chemical compounds maker Lanxess (LXSG.DE), have additionally mentioned they might eat extra coal. learn extra

Corporations compelled by price pressures or nationwide coverage to make use of the gas may make up floor by discovering different methods to burnish their environmental credentials, or by specializing in the S and G in ESG, business sources add.

“When your emissions go up, all different issues being equal, you’re in additional hassle from a scores perspective,” mentioned Sylvain Vanston, government director, local weather change funding analysis at MSCI. “In case you provide you with a implausible new dedication, that would counterbalance it.”

However up to now, few firms have managed to discover a silver bullet to counteract use of the closely polluting gas. Lanxess, which has beforehand acknowledged the hit to its carbon footprint, declined to touch upon the potential influence on its ESG score of burning extra coal.

It has nonetheless identified that if it costs itself out of the market, it may imply plant closures and job losses, probably affecting the “social” facet of its operations.

There are different choices out there to firms trying to protect their scores. David McNeil, head of local weather threat at Sustainable Fitch, mentioned the company appears at an organization’s broad ESG influence when assessing it. “If an influence utility is issuing a inexperienced bond, that’s one thing we might have a look at,” he mentioned.

Some firms reminiscent of Italian utility Enel (ENEI.MI) have issued sustainability-linked bonds related to their general sustainability efficiency.

Sustainability-linked bonds and inexperienced bonds, which fund particular environmental initiatives, have nonetheless carried out poorly in current months because the prospect of upper rates of interest and a potential recession battered company debt markets extra broadly.

Germany’s largest energy producer RWE (RWEG.DE), whose CEO mentioned final month that Germany wanted to save lots of fuel in its energy sector by changing it with coal, has beforehand issued inexperienced bonds.

A spokesperson for the group mentioned RWE continues to be targeted on increasing its use of renewable energies and hydrogen with a view to additional accelerating a coal phase-out, a method to which its buyers had given “broad approval”.

Different firms, reminiscent of Europe’s prime copper smelter Aurubis (NAFG.DE), additionally mentioned their intention stays to decarbonise, regardless of the extra short-term complication of together with coal within the power combine.

Buyers insist they’re equally dedicated. AXA Funding Managers, Allianz World Buyers and Zurich Insurance coverage, which between them handle $1.8 trillion in property, all mentioned they have been preserving to their plans to chop again on coal regardless of the conflict in Ukraine.

“We aren’t altering our place and we aren’t altering our coverage – we’re sticking to the course,” mentioned Zurich group head of sustainability Linda Freiner.

To date Europe’s power disaster is exhibiting few indicators of being resolved. It stays to be seen how far both firms or buyers can maintain religion within the significance of long-term ESG rules like reducing out coal if the state of affairs worsens.

“Coal throws up an power safety query that within the quick time period is in battle with the decarbonisation drawback,” mentioned Alex Simcox, head of ESG funding at asset supervisor Mondrian.

“In case you are in Germany and Russia cuts off fuel, even in case you are within the Inexperienced get together, it’s best to settle for that the extension of coal-fired energy is a realistic reply.”

Reporting by Carolyn Cohn in London and Christoph Steitz in Frankfurt; Extra reporting by Ludwig Burger, Christoph Steitz and Patricia Weiss in Frankfurt, Michael Hogan in Hamburg and Marc Jones in London; Enhancing by Jan Harvey

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