In this weekly feature, FSA shows 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.
ESG assessment led by: Maarten Bloemen, executive VP of Templeton’s global equity group, ESG research coordinator and portfolio manager.
Company: A China-based mid-cap wind-farm operator, assessed for Templeton Global Climate Change Fund.
China’s ambitious renewable energy targets and supportive policies are driving tremendous growth in the installed base of wind installations.
In China, Templeton found a wind farm operator “with significant expertise in renewable energy”, which had an attractive valuation compared to global peer companies.
”We were sufficiently interested to go and meet with the company at its headquarters to gain further insight,” Bloemen said.
They found that despite its focus on wind power, the company continued to operate coal mines and coal power plants, which have some of the highest carbon dioxide emissions.
To be eligible for the fund’s portfolio, electricity producers must be aligned with the Paris Agreement emissions goal of keeping global temperature increases below 2°C. Bloemen said the emissions metric is measured by individual companies, which report it through the carbon disclosure project.
Although the firm’s ESG policy is to exclude fossil fuel producers, an exception could be made if the company does not intend to expand coal power generation and commits to reducing it.
“After discussing this with the company, we confirmed they had not made commitments to reduce coal power generation to levels acceptable for the fund. The company has since announced plans to invest in new coal plants.”
Bloemen said there were also concerns about government ownership of the company because decisions could be taken without considering shareholder interests.
“We have seen in numerous situations – in China and elsewhere – that direct government ownership has a negative influence on decision-making at a company.
“In this instance, we were concerned that the company would allocate further capital to inefficient power projects following a reduction in the tariffs available, even if it did not meet reasonable return criteria.
“Discussions with the company about returning more capital to shareholders were unproductive.”
Based on the evaluation, Templeton decided to exclude the company from the fund.
“We encouraged the company to consider setting hard targets or divesting from coal assets,” Bloemen said, and added that they will continue to watch to company for progress.