ESG caught between Label, NGO, Rating Agency and Stock Index

Methodologies for measuring the sustainability of businesses are expanding and evolving rapidly. Indeed, as an investor, how to miss the ESG criteria and carbon emissions generated by a company? But what if, beyond collective awareness, valuation of companies was impacted by its carbon emissions?

While at the end of March, Euronext announced the creation of a new CAC 40 ESG index composed of 40 companies listed on the Paris Stock Exchange (including BNP Paribas, Crédit Agricole and Société Générale to name only the financial institutions), selected by Vigeo Eiris based on the ISR label, the NGO Oxfam launches its report titled « CAC : the unsustainable model of large French companies » which reveals that, despite the commitments of companies, the level of CAC40 emissions leads to global warming of + 3.5°C by 2100, far above the 1.5°C target set out in the Paris Agreement.

Based on data provided by the Carbon4 Finance consulting company, Oxfam France reveals the full carbon footprint of the largest French companies and their climate trajectory, which takes into account their current emissions and their strategic commitments.

Among the companies studied, 4 of them (BNP Paribas, Société Générale, Crédit Agricole and TOTAL, the majority of which are found in the selection of the CAC 40 ESG), have a carbon footprint greater than the one of France.

The study reveals that on average, for 1.000 euros of turnover, the carbon footprint of CAC40 companies amounts to 4.1 tonnes of CO2eq, or the equivalent of emissions generated for a return trip to Paris-Sydney by plane.

Although no business sector is aligned with the Paris Agreement, disparities exist and out of the 35 companies analyzed, only 3 (EDF, Schneider Electric and Legrand) have commitments likely to keep them on a trajectory compatible with warming below 2°C, and only 6 companies (including Saint Gobain, Michelin, Engie and Vallourec) have adopted a strategy to reduce their overall emissions.

22 companies have a trajectory associated with a warming between 2°C and 4°C and 10 companies (including banks, Total, TechnipFMC and Dassault Aviation) are on a climatic trajectory above + 4°C.

According to Oxfam, the commitments made in the fight against climate change are very insufficient and too few companies still include in their budgets the necessary capital to start their ecological transition, fearing that these investments would frighten the shareholders. However, in an interview with Novethic, Vincent Auriac, founder of the Axylia firm, explains that the valuation of a company must be adjusted to the price of carbon ; Thus, Danone shares, using the firm’s methodology, would have increased by 48% in three years.

“If we do not look only at the classic indicators, and if we widen our field of vision, we realize that the efforts generated by a strategy oriented on the sustainable transition are paying off”.

Vincent Auriac, founder of Axylia

Integrating the cost of carbon emissions to assess the valuation of a company is a first step which follows the step of calculating the costs of positive and negative externalities, the added value of social capital, the reputational risk and all these “extra financial” criteria that finance struggles to take into account in its indices, scorings and P & Ls.

So, ESG, indices, rating agencies, labels, NGOs? The question remains: who to trust? And faced with these distortions of figures and results, do investors have better alternative than to remain vigilant and to internalize their own methodology?

The Oxfam report can be viewed in full here and the Carbon4 methodology here

Article: Joana Foglia

Post Author: Wealth Monaco