On September 27, climate activists in Liverpool, England loudly disrupted a government-sponsored event called “Reaching Net Zero.” While the heckling called attention to several specific concerns in the UK and the US, it also illustrated a broader challenge for many ESG investors—understanding that “sustainability” often requires patience.
Among the objections protestors hurled during the event, the most acerbic were aimed at a speaker from Drax Group, which is one of the largest suppliers of biomass fuel to the UK. To put it plainly, Drax turns scrap wood (and virgin lumber) into pellets that are burned to produce power. Its plant in north Yorkshire is reportedly the single largest source of CO2 emissions in the UK and the company paid millions of dollars to settle charges of pollution at its harvesting facility in Gloster, Mississippi.
“Chopping down trees halfway around the world and shipping them over here [to become fuel] is not sustainable,” one activist shouted.
But Drax has consistently promoted its biomass fuel as sustainable, renewable energy.
Technically, Drax is right. Unlike the supply of fossil fuel, which is limited, Drax and other biomass producers can plant new trees to replace those harvested for fuel. So, the practice could continue indefinitely. In addition, managed forests soak up carbon dioxide. But the technical definition of sustainability appears to fall short of the interpretation provided by the United Nations: “Meeting the needs of the present without compromising the ability of future generations to meet their own needs.”
With this in mind, how could any conscientious investor own Drax? The answer lies in the forward-looking nature of ESG investing, the amount of patience investors have, and their willingness to advocate for change.
Despite its shortcomings, Drax could be heading in the right direction. It was the first energy company in the world to announce the goal of becoming “carbon negative” by 2030, according to its website. In this case, and in other cases where sustainable business practices are debatable, it is important to remember that the UN’s definition of sustainability is a goal. And some not-so-gentle prodding by shareholders can push management to pursue that goal more aggressively.
In fact, an active approach to ESG is widely considered a much more effective catalyst for change than divesting, because for every seller there is usually another buyer waiting in the wings. (Of course, there are plenty of other valid reasons for divesting.)
ESG investors enjoy a seat at the corporate table—a compelling advantage that is often overlooked by critics who compare ESG to picking out the cleanest shirt in a pile of dirty laundry. Shareholders are ramping up their advocacy efforts, with a record number of ESG-related proposals garnering majority votes in the first half of 2022, according to Proxy Review. And ratings providers are engaging with management and board members to add qualitative measures to their data-driven methodologies.
“Many ESG data providers focus on information disclosed by companies and historical data points, rather than anticipating the future trajectory of a company’s sustainability efforts,” Fidelity explains on its website. “While this information is useful for assessing where an investment stands today, it can fail to assess where it may be heading in the future…”