A new study by Morningstar Sustainalytics highlights ten companies that are taking significant steps to address climate change. Only one of these companies, Walmart, is based in the United States. The others include Canadian Natural Resources, Taiwan Semiconductor, Siemens, Dr Reddy’s Laboratories, Cathay Financial, Unibail-Rodamco-Westfield, Lundin Mining, Acciona Energias Renovables, and Vodacom Group.
The study, “Navigating Material Climate Risks in the Global Equities Market,” examines how businesses are transitioning towards a low-carbon economy amid increasing concerns about global warming and the rise of greenhouse gas emissions. The financial sector views global warming as a substantial threat, with nations striving to limit temperature increases to well below 2.0 degrees Celsius, aiming for 1.5 degrees Celsius above preindustrial levels as per the 2015 Paris Agreement. Achieving this involves setting targets for net zero greenhouse gas emissions by 2050 and reducing emissions by 45% by 2030.
Analysts at Morningstar Sustainalytics note that more financial institutions are incorporating climate change into their investment strategies. Climate change is increasingly seen as a “threat multiplier” that can amplify various hazards impacting jobs, livelihoods, and investment portfolios. Companies and investors are under pressure to meet emissions targets due to stricter regulations, political debates, and the physical impacts of climate change. These challenges also present opportunities. The study incorporates the Sustainalytics Low Carbon Transition Rating, Physical Climate Risk Metrics, ESG Risk Ratings, and Morningstar equity research. It evaluates 3,373 companies from the Morningstar Global Markets Large-Mid Cap Index using these metrics.
The study found that nearly all companies are somewhat misaligned with net zero targets and often underreport carbon emissions, especially scope 3 emissions, which are not directly controlled by the companies. Physical climate risks vary widely, with most sectors facing estimated annual losses of 1% to 5% of operating cash flow.
Despite these challenges, the analysts identified ten companies leading their sectors in the carbon transition. These companies include Vodacom Group, Canadian Natural Resources, Unibail-Rodamco-Westfield, Cathay Financial Holding, Siemens, Corporacion Acciona Energía Internacional, Lundin Mining, Taiwan Semiconductor, Walmart, and Dr Reddy’s Laboratories.
Vodacom Group, with a Quantitative Morningstar Rating of 3 stars and a Very High Uncertainty Rating, operates in the telecom services industry. Canadian Natural Resources, an oil and gas exploration and production company, has no specific Morningstar ratings listed. Unibail-Rodamco-Westfield, a retail REIT, is highly rated with 4 stars and has a history of acquiring large malls and offices. Its iconic assets include the Carrousel du Louvre in Paris and Westfield World Trade Center in New York. However, its large debt load remains a concern.
Cathay Financial Holding, operating in the life insurance industry, has a 3-star rating and a Very High Uncertainty Rating. Siemens, a conglomerate in the specialty industrial machinery sector, has a 3-star rating and an Exemplary Capital Allocation Rating. Siemens’ diverse high-quality businesses benefit from long-term growth trends in digitalisation and energy transition.
Corporacion Acciona Energía Internacional, a renewable energy utility, was spun off from Acciona in 2021 to revive capacity growth. It is mainly involved in onshore wind, hydro dams, solar photovoltaic, and battery storage. Lundin Mining, in the copper industry, holds a 3-star rating and a High Uncertainty Rating. Taiwan Semiconductor, the world’s largest dedicated contract chip manufacturer, enjoys higher gross margins due to its economies of scale and advanced technology.
Walmart, with a 2-star rating, stands out for its extensive physical footprint and strong financial position. Lastly, Dr Reddy’s Laboratories, in the drug manufacturing sector, has a 2-star rating and a High Uncertainty Rating.
These ten companies are at the forefront of the global effort to tackle climate change, each contributing in different ways and sectors. Their progress and strategies offer valuable insights for investors looking to support and benefit from the transition to a low-carbon economy.
i(x) Net Zero plc (LON:IX) is an investing company which focusses on Energy Transition and Sustainability in the Built Environment, and was founded in 2015 by Trevor Neilson, Pär Lindström and Howard W. Buffett.
