Amenity revisits the five ESG themes that our Safeguard platform picked as “must watch” at the start of 2022. We take a look at how extensively the themes were featured in news, earnings calls, and SEC filings over the year, as well as which companies’ activities best captured those themes.
As we enter the new year, Amenity Analytics revisits the ESG post that kicked-off 2022 (5 ESG Themes for 2022) and looks at how those themes played out during the year. This recap compares at the topic level how our themes evolved from 2021 to 2022, and it shows how those themes have informed our outlook for 2023. Our end-of-year analysis includes all document types we cover in news, earnings calls, and SEC filings.
Amenity, now a part of Symphony, utilizes NLP technology to review thousands of text sources every day, including news, earnings calls, and SEC filings. Our language models are trained to contextually hone in on a variety of ESG themes and topics to deliver real-time scoring and insights to our data users.
Our first theme, materiality and greenwashing, took form in a variety of ways throughout the year. From an ESG standpoint, this theme overlaps with environmental and governance categories, since many of the topics within materiality and greenwashing have to do with the marketing and communication of ESG strategy by a firm.
At the topic level, our ESG Safeguard platform saw a 600% increase in mentions of “green portfolios.” At the same time, governance risk associated with greenwashing was on the rise with a 97% increase in mentions of “deceptive marketing.” Regulators and investors have been more aware of greenwashing practices over the past year, resulting in some interesting activity.
In October, the wood-pellet company Enviva (EVA:US) was hit with a short sell based on the argument that they have been greenwashing. Enviva had been cited in the past for clear-cutting forests in rural parts of the U.S. and for contributing to heavy pollution in areas where they process lumber. The company largely relies on subsidies that categorize wood pellets as sustainable fuel for the time being. The short seller Blue Orca Capital also saw this as a risk to the company's business fundamentals.
Enviva was just one of many examples of how companies are operating in the gray margins by marketing themselves as environmentally friendly. In a world where theory and reality are often not aligned, it creates an opportunity for companies to direct the sustainability narrative themselves.
In 2023, concerned parties will be increasingly focused on material issues and how companies are acting on those issues, not just talking about them. This emphasizes the need for real-time methodologies that can quickly unpack corporate strategy and risk management when it comes to ESG.
Our second theme in ESG focused on circular economies, waste reduction, and improved efficiency of scarce resources. From the chart below, we can see that this theme had great exposure in the consumer goods sector. Plastic waste from shipping and packaging has been an area of criticism over the years for a vast number of companies. In 2022 we saw more discussion around reduction of virgin plastic and increased interest in recycled and sustainable packaging.
While the consumer goods sector made some strides in 2022 around packaging and waste, the industrials and materials sectors made more clear progress around recycling, particularly for metals. Most major companies in this sector have discussed recycling and supply chain endeavors for materials such as aluminum, steel, lithium and cobalt. This is partly due to subsidies and to business opportunities as demand for electric vehicle components and building materials increased substantially.
Historically, many of the companies in metals and mining have been criticized for ESG-related matters. But many of these companies appear to at least have a clear idea of what ESG means for them and how to move towards the economy of tomorrow.
One area in resource management that has seen shockingly little improvement is around deforestation. At COP26 in Glasgow, deforestation was made a high priority item by the signatory parties. Yet, very few companies are discussing the topic on their sustainability roadmaps, and some of the biggest names tied to deforestation have made little progress on their goals, such as Brazilian meat producer JBS (JBSS3:BR), which we covered in our Climate Week webinar.
Deforestation did garner scrutiny later in 2022 with some grocers and distributors removing JBS products from their offerings due to deforestation concerns. Forests are one of the biggest carbon sinks on the planet, and protection for these ecosystems is an important key to reversing climate change.
The year 2022 was a tumultuous one for labor, as strikes and union efforts loomed large once again. The storylines that garnered the most attention were Elon Musk’s treatment of Tesla (TSLA:US) employees, followed by his treatment of Twitter employees post-acquisition, as well as the saga around Starbucks (SBUX:US) vs. their unionizing workers.
While news surrounding unions made for the loudest headlines in 2022, perhaps the most disturbing trend was the uptick in news around child labor. Most recently, Hyundai (005380:KR), JBS (JBSS3:BR), and McDonald’s (MCD:US) were implicated in controversies surrounding child labor in America. Employee engagement will continue to be a driving force behind the human capital category in ESG, but recent news around child labor has shown that there are other pressing matters at stake in 2023.
Hydrogen is the driving force behind this theme as cleantech has gained momentum in recent years. With wind and solar becoming cheaper due to increased availability, more companies have been exploring green hydrogen production as a viable business opportunity. Some companies such as Plug Power (PLUG:US) have been focusing on hydrogen production for years and have signed deals with companies such as Walmart (WMT:US) and Amazon (AMZN:US) to provide hydrogen fuel. We recapped hydrogen and the Inflation Reduction Act in August, highlighting the top players in this growing field.
Hydrogen has become more popular with metals and mining as it represents a low carbon solution for many of the industrial applications that traditionally require diesel engines. Fortescue Metals (FMG:AU) of Australia plans to be a major hydrogen supplier by the end of the decade as they transition their mining operations towards a greener future.
Even at the consumer level, hydrogen has gained more popularity for car manufacturers like Renault (RNO:FR). What was once a novelty seems to be here to stay as hydrogen solutions have permeated many different industries and use cases. We will be on the lookout for more innovation in 2023.
External forces manifested in a variety of ways in 2022, with many having a direct or indirect impact on company behavior. Most notably, when Russia invaded Ukraine and the world reacted by imposing sanctions on Russian oil, these developments left Europe particularly vulnerable from an energy standpoint. Many companies in Europe that are involved in the energy and utility sectors were forced to re-think their roadmap on renewables.
In the U.S., the Inflation Reduction Act put substantial subsidies in place for the development and strengthening of renewable energy, clean technologies, electric vehicle manufacturing, and supply chains. In particular, the last item has led to a groundswell of re-shoring in American manufacturing for electric vehicles and circular economies for EV battery production.
From a consumer lens, mentions of “food price” and “food security” soared within an inflationary environment. Consumers tried to do more with less, and corporations (especially in the consumer food category) discussed how to handle the situation, often coming up with novel concepts like smaller packages and value offers.
Moving into 2023, we are on the lookout for many of the same themes with a few exceptions. Materiality and greenwashing have become distinct themes with different facets. As such, we will treat them as separate entities, with materiality being more concerned with the upside of ESG business lines and opportunities. Greenwashing will pertain to false-marketing and governance risk around ESG. The theme of external forces impacting companies largely overlaps in these categories, and we will remove it from our 2023 ESG themes. Here are our five themes for 2023 in ESG:
The topic of ESG has become more contentious in 2022, with multiple parties dismayed by how it has become politicized or incorporated into ratings and investment decisions. We are not here to debate the political merits and shortcomings of ESG. Rather, as we head into 2023, we would like to remember that ESG is an ideology with multiple meanings.
To this analyst, ESG advocates that there is more than one way to evaluate a company. It supports the idea that a company can make a positive impact in the world while having a positive impact on the bottom line. ESG represents hope, represents change, and represents many things for many people. As we head into 2023, an important question to reflect on is, what does ESG mean to you?
Request an ESG demo today to find out how you can analyze earnings call transcripts and other financial documents with our text analytics platform. Spot outliers, identify critical insights, and understand key drivers.
Amenity Analytics (part of Symphony) is the industry leader in providing insights from unstructured text by using Natural Language Processing (NLP) assisted by Artificial Intelligence (AI) and Machine Learning (ML). Amenity’s NLP system is a sector-agnostic, language-dependent tool for quantitative text analysis that is deployed across the financial services industry and beyond.
This communication does not represent investment advice. Transcript text provided by FACTSET and S&P Global Market Intelligence.
Copyright ©2023 Amenity Analytics.
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