Not yet ESG ready – 14 August 2019

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Pictet AM declines investment in an expanding commodities producer, based on governance issues and delayed action in reducing emissions.

In this weekly feature, FSA showcases a potential investment that a firm has declined on the basis of ESG criteria. The purpose is to highlight firms that are actually putting into practice an aspirational ESG policy.

 

Commentary by: Evgenia Molotova, senior investment manager at Pictet Asset Management

Company: An Eastern European base metals producer

Evaluated for: a Pictet Asset Management developed market equities fund

Background: Base metal suppliers targeting electric vehicle production are an investment opportunity linked to a structural trend. About 1% of the world’s vehicles are electric and by 2035, some research estimates say the figure will be 34% of all passenger vehicle sales. Base metals such as copper are used widely in electric vehicles, along with a list of others – current Tesla models also use lithium, graphite, cobalt, titanium, aluminium and nickel. As EV sales accelerate, commodities suppliers are adding capacity to meet demand.

Pictet AM saw the company as an attractive investment opportunity because it is a leading producer of base metals globally, “geared to attractive secular trends such as vehicle electrification and pollution abatement”, according to Molotova.

The company is well-positioned as electric vehicles sales increase and it “owns tier 1 assets in corresponding metals, which allows it to generate strong and stable cash flow”, she said.

“We got interested in the stock because of the quality of its [metal] deposits and potential scarcity of its key metals in the future”. Additionally, the company has historically paid out a large dividend and, given its market position, had an attractive valuation, she said.

But during the ESG assessment, the team determined that the company was currently “un-investible”.

“Our primary concerns relate to this company’s governance, ownership structure, air pollution and poor health and safety record.

“The company pledged to make a substantial investment in new equipment to reduce SOx [sulfur oxide] emissions some time ago, however, the implementation of this program so far has been delayed.

“We are also concerned about the history of conflicts between key shareholders and effects it might have on the future capital allocation policy.”

The company looked too good to ignore, so although the fund manager did not take a position, the ESG team decided to work with the company’s management team to address the ESG issues.

The team is also engaged with the company through Climate Action 100+, an investor-led initiative to ensure greenhouse gas emitters take necessary action on climate change, she said.

Pictet AM could eventually take a position in the company, depending on progress. “We will continue to monitor the developments and interact with the company,” Molotova said.

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