As Panvestors, can we ensure our portfolio companies stay on the right side of history as social, human, environmental and economic challenges are resolved? We can only try. Trying not only makes sense for stakeholders but also shareholders. In support of the upcoming COP26 and building on the momentum of the last few Arcus editions, in today’s Arcus I will share some examples of how different stakeholders have found themselves on the wrong side of the climate challenge. I will conclude by highlighting a question that we ask all our portfolio companies and candidates, which not only helps us avoid the wrong side but also convert historical challenges into opportunities.
Audacious Climate Claims or Legal Misrepresentations?
In a historic world first, On 26th August 2021, Australia’s second largest independent oil/gas company Santos was sued for the veracity of their net zero emissions targets. The Australasian Centre for Corporate Responsibility (ACCR) is challenging Santos in the Federal Court of Australia for their claims that natural gas provides “clean energy” and that it (Santos) has a “credible and clear plan” to achieve “net zero” emissions by 2040. Amazingly it was less than 12 months ago that Santos proudly brought forward their “net zero” ambitions to 2040 from 2050. So, what is the problem? Simply put, Santos’ claims of net zero are not being backed up with a clear strategy nor by its actions.
“Santos has perfected the art of greenwashing, and shareholders continue to be misled by Santos’ clean energy claims” Dan Gocher, Director of Climate and Environment, ACCR
Source: Santos
So, does Australia have greenwashing laws for their net zero claims? Actually, so far Australia does not have specific anti-greenwashing laws, and existing consumer laws are being used by lawyers to prohibit what most would consider unethical greenwashing. ACCR claims that by making the above representations, Santos has engaged in conduct that was misleading or likely to mislead in contravention of s 1041H of the Corporations Act 2001 (Cth) and s 18 of the Australian Consumer Law (ACL) (Schedule 2 of the Competition and Consumer Act 2010 (Cth)). Further, in making representations that gas is a ‘clean’ fuel or energy source, ACCR claims that Santos engaged in conduct that was liable to mislead the public as to the nature, characteristics, suitability, and quality of Santos’ primary product - being ‘natural’ gas – contrary to s33 of the ACL. Technology and science debate aside, ACCR’s concerns over misrepresentation by Santos with its climate claims was given much support by the recently announced Santos/Oil Search proposed merger. Oil Search would increase Santos’ 2P oil reserves by 47% to 1,274 mmboe, and increase annual fossil fuel production by 30% to 115 mmboe. Not surprising that ACCR was quick to lodge their claim above. As Panvestors, we believe that given the seriousness of the risks of continued fossil fuel use, companies like Santos need to be completely transparent about their future planning. Their plans should be robust, detailed and open to scrutiny, especially if they are being relied on by consumers and investors alike. Climate claims are now being taken very seriously indeed.
“Companies have a legal obligation to be upfront and honest with investors in their annual reports. …Instead we see ‘net zero’ plans that contain very little detail and which are often contingent for their success on unproven processes….” Elaine Johnson, EDO Director of Legal Strategy
We believe that it is only a matter of time before greenwashing laws such as those present in some European markets such as France come to Australia. History of corporate legislation has shown that laws come on the back of many legal battles, and as seen in the charts below climate cases are gathering pace as are regulations. Cases like Santos’ will no doubt determine the right side of history even in terms of climate claims of companies.
President & Cabinet Climate Negligent
Companies are not the only institutions that are facing the scrutiny over their claims around climate. Governments are also on the receiving end of climate claim scrutiny. For now, companies can still hide behind laws or lack thereof for their questionable climate credentials, governments cannot. As can be seen by the success of the Jakarta citizens and many other cases around the world, climate legislation is coming. In another historic ruling, a Jakarta court on 16th September 2021 ruled that the Indonesian government had failed to uphold citizens' right to clean air. The court ruled that the defendants (Indonesian President Joko Widodo, three cabinet ministers, the Jakarta governor, and two provincial leaders) were guilty of committing "unlawful acts" and failing to combat air pollution in the national capital. 32 citizens of Indonesia’s Capital Jakarta claimed the government had been negligent in upholding its obligations in managing Jakarta's air pollution and had failed to fulfil residents' right to clean air. They wanted local and national governments to enforce environmental safeguards, place strict regulations on coal-powered plants, and be transparent on air pollution policies. How bad was their negligence? The World Health Organization (WHO) sets the standard for PM2.5 in safe ambient air quality at 10 micrograms per cubic meter. In Indonesia, the national safe standard set by the government is 15 micrograms per cubic meter. But in Jakarta, readings regularly exceed both levels -- with an average annual PM2.5 concentration of 39.6 micrograms per cubic meter, according to an IQAir report.
"I respectfully submit that the failure of Indonesian governments to improve substandard outdoor air quality in Jakarta, especially when they have failed to act with the requisite degree of urgency and diligence in the face of prolonged and persistent exceedances of air quality standards, is a violation of the constitutional right to a good and healthy environment." UN Special Rapporteur for Human Rights and the Environment, David R. Boyd
Indonesia is being asked to do more but even when countries do enact climate laws, they are being scrutinized now. In April of 2021 Germany's highest court ruled that the government's climate legislation was insufficient, lacking detail on emission reduction targets beyond 2030. The German court's decision follows a rising number of similar cases across the world, with the 2019 Netherland's Supreme Court decision forcing the government to meet emission reduction targets seen as the inspiration for many of these recent cases against governments.
The Panarchy Approach
Only time will tell whether our portfolio companies are on the right side of history when it comes to solving for global challenges in a profitable way. From the above examples it is clear that other than staying away from companies delivering negative externalities, we cannot allow our companies to make unchecked climate claims.
More importantly at Panarchy Partners, we see historic challenges such as climate change providing significant opportunities. One question that helps solve for our above ambitions is – What is the most important regulation/law impacting your industry/firm in the next 5-10 years?
For many of you this might seem like an obvious question and one that most smart investors would surely ask their portfolio company’s CEO. Yes, they do. However, when this question is asked of the sustainability teams of firms the answers can be very revealing indeed. Before I get any raised eyebrows and questions on potential nonpublic information, I can assure you we already have done our homework and the answers are there for us to confirm our thesis on a company’s future positioning.
As an example, roughly 5-6% of all CO2 emissions in developed markets come from Medium and Heavy-Duty Vehicles (Trucks and Buses). This industry is a big problem and also opportunity for any country wanting to make net zero claims. It is not surprising that significant regulations are coming through in the coming 5 years that could change how truck and bus fleets will look like by 2030. Is this a risk or an opportunity? Do companies know where they are positioned and what it will cost them to be compliant? What is the potential positive impact that some of these regulations could have? These are just some of the questions if answered well by your companies, will improve their chances on being on the right side of history for stakeholders and shareholders.
Following on from our example above, we have made estimates of the potential positive CO2 emission impact that certain laws could have in the coming decade. Armed with such impact analysis we see why regulations will or will not be implemented. Which companies are the clear beneficiaries of these laws being implemented is what we invest in at Panarchy Partners.
Conclusion
Hopefully there are three clear takeaways from this Arcus. 1) Boards and management cannot make ambit climate claims, similar to how they cannot make ambit financial claims 2) climate regulations is a structural trend that is only gathering pace and 3) we look for companies that are not just seeking to mitigate risk but provide value added solutions to solve for this challenge and thus create an opportunity for themselves, stakeholders and shareholders.
Happy Panvesting
Munib