Target Carbon Neutrality

In this week's FinMail we are going to understand why the companies have taken up the race to become net carbon neutral companies and also discuss how you as an investor could benefit from this shifting phase.

The Story:

Facebook recently made a deal with a Mumbai-based Company, CleanMax. The deal is to set up a 32 Megawatt Wind Power Project in Karnataka. The deal is in such a way that CleanMax will own the project and Facebook will own the Power. It means that the project will be owned by CleanMax but the power that the project generates will be bought by Facebook and thus essentially meaning, Facebook ending up owning the power. The project is already commissioned with 50% capacity and generating power.

This is not Facebook's first attempt at generating clean energy. It had announced a similar tie-up with Singapore-based SunSeap which obviously is a solar energy company. Facebook will use clean energy to power up its data center in Asia and in Singapore.

This deal will help Facebook achieve its 100% net carbon zero targets which it set a few years back. It will now mean that Facebook will totally operate on renewable energy as well. And Facebook is not in this race alone, many companies - giant corporates that are a big contributor to Green House Gases have taken up this step to become a net-zero carbon company for the betterment of the planet earth. But what does it really mean?

Net Zero Emission Companies:

Being a Net Zero Carbon company does not mean that the company will not emit carbon dioxide or any other Green House Gases (GHG) in the environment. But it means that the company will neutralize all the GHG that it has released by contributing to activities that reduce GHG from the environment. Hence they are also called Net Carbon Neutral Companies. They reduce the amount of carbon they emit by doing activities that reduce carbon.

Any business or organization when conducting its day-to-day activities emits certain types of gases like Carbon Dioxide, Nitrogen Oxide, Sulfur Oxide (Green House Gases) causing pollution and contributing to Global Warming. Simple activities like using Electronic devices - Laptops, Mobile, etc even contribute to carbon emission as the electricity used to power up these devices is generated by burning coal. And it is not possible to completely switch to clean energy as the world is still adapting to renewable energy.

How does a company become net carbon neutral?

As we mentioned earlier that it is not possible for a company to sustain totally on clean energy sources so what it does is that it participates in such activities which reduces carbon from the environment. Let's say, a company is emitting 1000 metric tons of carbon every year. So by using solar energy and wind energy in some offices it was able to bring down its emission to 300 metric tons a year but in some offices, it was not possible to switch to clean energy. So instead of spending crores and crores of money to set up a system of clean energy, it spends money on funding clean energy startups, planting trees, donating gas stoves to those cooking from wood etc.

Infosys was able to achieve net-zero carbon levels in the same way. Wherever it was possible, it switched to clean energy and where it was not possible, it engaged in activities like funding gas stoves or electric stoves for people cooking with wood. So by donating such equipment, it essentially helped reducing carbon or GHG emissions in the environment.

Why do Companies around the world have started turning Carbon Neutral Companies?

Well, the obvious answer is that they want to reduce their contribution to the destruction of the world. Year on year we are seeing rising temperatures due to increasing GHG in the atmosphere. As per The Carbon Majors Database, a report by the Carbon Disclosures Project (CDP), 71% of the global GHGs are emitted by just 100 companies out of Millions of Companies in the world. Of it, a major contributor to the GHG is the energy sector and precisely companies in the business of fossil fuels.

The world is rapidly changing and we are now becoming concerned about our planet and the life on it and thus we are now more aware of the damage that some corporations make. The CDP also states that 32% of the emissions come from companies that are publicly owned by investors like us. About half of the emission can be traced back to 25 State-owned companies. With global environment pollution rising there is more and more pressure on some companies to reduce their impact on the environment. After signing the Paris Agreements, the governments too are under commitment to keep a watch on the companies that go over their limit to emit GHG. As we know, global fossil fuel reserves are tanking and with this, a cloud looms over the future of such companies that depend on fossil reserves for their profits. So the question arises that will an investor be a part of a company that will be heavily regulated or a future that has a question mark behind it.

So there arises the concept of ESG - Environmental, Social and Corporate Governance. ESG as a concept was born when Investors started looking out for companies that function ethically and morally in the world. So a company that looks up for the environment or is socially aware of various equalities and diversities or companies that maintain good governance of its activities are companies that qualify for ESG. ESG as an Investment theme is gaining traction as more and more people are finding for companies that function responsibly. And this is where Net Zero Carbon or Net Carbon Neutral concept also jumps in. Net carbon-neutral forms part of the Environmental part and consists of companies that promote Clean Energy or in the business of reducing Global Warming.

What does it mean for you?

Corporate Leaders of the world are moving towards sustainability and environmental equality. Investors around the world too are getting accustomed to ESG as a theme of Investing. And as more and more awareness is spreading about environmental, social and governance issues that humanity as a whole is facing, Investors are naturally preferring companies that stand out their way for showcasing responsibility. In USA, ESG funds received $51.1 Billion of money from investors in the year 2020 alone which is more than double from the $21 Billion received in 2019. In India, too various Mutual Fund Houses have launched ESG funds. So ESG as a theme is gaining traction here too.

How can you benefit from the shift in ESG trend?

Investors preferring ESG companies over normal companies is already a growing trend globally. In India too it is gaining traction as we mentioned. So, ESG as an Investment theme is likely to gain more preference as time passes and an early entry as an Investor in this theme can be beneficial. If we look at the performance of ESG Index compared to Nifty 50, the Nifty 50 Index has given a 72.54% (TRI) return in the past 1 year as compared to ESG Index's 77.23% (TRI).

Nifty100 ESG Index stands at 16.69% (TRI) at 5 Year Return as compared to Nifty50's 15.13% (TRI)

Secondly, as major companies are shifting towards Green Energy to source their power consumption, the companies involved in the business of clean energy will get benefitted and it could be an opportunity for Investors to forward to.

So if you're going to invest in those companies which will it be? Tweet to us @yourfinman.

So that is it for this week's FinMail, we will see you in the next week. Stay safe, keep learning.

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