The forgotten factor in selecting companies for this big investment theme

Justin Gray

Firetrail Investments

When it comes to analysing a company’s impact on the environment, it is important to look below the surface.

Take Air Liquide, a global leader in industrial gases, as an example. It might seem like they’re a big contributor to greenhouse gas emissions. In fact, their emissions intensity (using Scope 1, 2 and 31 measures of carbon emissions) is among the top 10% of companies in the MSCI World Index. However, appearances can be deceiving.

To really understand Air Liquide’s role in contributing to decarbonisation, we need to consider the contribution the company is making to the globe’s avoided emissions, also known as Scope 4 emissions.

The concept of ‘avoided’ — or Scope 4 — emissions is based on the idea that investors should look beyond a company’s efforts to reduce greenhouse gas emissions in its own operations and supply chains. By looking at Scope 4 emissions, investors are considering the impact a company has through its product and services, outside of its own value chain.

For example, a company that produces electric vehicles could claim Scope 4 emissions for the emissions avoided by replacing conventional vehicles with their products. It gives us a more complete picture of a company’s environmental footprint.

Air Liquide produces hydrogen from natural gas, which is their biggest source of Scope 1 emissions. The company also uses purchased energy to operate Air Separation Units (ASUs) that generate oxygen, nitrogen, argon, and noble gases from air. This is their biggest source of Scope 2 emissions.

When we analyse Air Liquide’s contribution to Scope 4 avoided emissions, hydrogen is produced to remove sulfur from fuels. This lowers black carbon emissions, which contribute to global warming and are harmful to human health.

This is a major part of Air Liquide’s avoided emissions. In fact, their avoided emissions are twice as much as their Scope 1 and 2 emissions (or 1.3 times their Scope 1, 2 and 3 emissions) as shown in the diagram below.

Importantly, Air Liquide has the potential to contribute even more for decarbonisation in the future. The company plans to reduce their Scope 1 emissions by producing green hydrogen. They also aim to reduce their Scope 2 emissions by using renewable electricity.

Air Liquide are also partnering with customers to decarbonise their operations – from more efficient ASUs in industrial applications, to capturing the CO2 in cement production. They are exploring the use of hydrogen in hard-to-abate industries like long-haul transport and aviation.

With 40% of investment opportunities coming from decarbonisation projects, Air Liquide is in a great position to continue fighting climate change. The company has a first-mover advantage across its complete carbon capture offering, having invested in this technology 10-20 years earlier than others. Known as an industry innovator, Air Liquide leads its peers, registering approximately one new patent per day.

The opportunity for companies and investors

Simply screening out companies with high reported emissions risks underestimating the true impact the companies are making toward the decarbonisation ambitions of the world. By considering avoided emissions, we can gain a more complete understanding of a company’s true impact on the environment.

For companies, the provision of new goods and services that avoid greenhouse gas emissions create a huge opportunity to meet the growing demand from stakeholders who want to reduce their climate impact.

For investors, the lack of internationally accepted avoided emissions standards provides a potential edge when analysing a company. The market may underestimate the full contribution to decarbonisation that a company is making given evolving standards and regulations. Understanding avoided emissions can allow investors to make more informed decisions.

Many companies in the Firetrail S3 Global Opportunities Fund have avoided emissions. These include:

  • Archer Daniels Midland (NYSE: ADM) and Darling Ingredients (NYSE: DAR) process soft commodities into biofuels to replace regular diesel in transportation.
  • Carrier Global (NYSE: CARR) manufactures energy-efficient heating and cooling appliances, replacing less efficient units.
  • Ecolab (NYSE: ECL) provides solutions that allow customers to use less water and less energy in their operational processes.
  • First Quantum Minerals (TSE: FM) extracts copper to electrify the grid to move away from fossil fuel-derived energy.
  • Techtronic Industries (HKG: 0669) is a leader in cordless power tools, replacing petrol with battery-powered alternatives.
  • Taiwan Semiconductor Manufacturing (TPE: 2330) produces leading-edge computing chips, lowering the amount of power consumption with each new iteration.

As investors, we look beyond appearances to dig deeper into a company’s operations and impact. By doing so, we make informed decisions about where to invest our clients’ capital to support companies that are making a positive impact on the world and generate excess returns in the process.

Learn more

At Firetrail, we aim to identify the best opportunities and build high-conviction portfolios of our best ideas. Whilst we prefer to focus on stock selection as opposed to macro-economic trends, we are finding compelling bottom-up opportunities across our Australian and Global equities portfolios that will be set to benefit materially from Deglobalisation, Decarbonisation and De-dollarisation in the coming years.

Managed Fund
Firetrail S3 Global Opportunities Fund
Global Shares

(1) Scope 1 covers the Greenhouse Gas (GHG) emissions that a company makes directly — for example while running its boilers and vehicles. Scope 2 emissions are indirect emissions generated from purchased energy, including electricity, steam, heating, and cooling. Scope 3 are all the emissions that an organisation is indirectly responsible for, up and down its value chain. For example, from buying products from its suppliers, and from its products when customers use them.


........
This article is prepared by Firetrail Investments Pty Limited (‘Firetrail’) (ABN 98 622 377 913, AFSL 516821) as the investment manager of the Firetrail Australian High Conviction Fund (ARSN 624 136 045), the Firetrail Absolute Return Fund (ARSN 624 135 879), the Firetrail Australian Small Companies Fund (ARSN 638 792 113) and the Firetrail S3 Global Opportunities Fund (ARSN 653 717 625) (‘the Funds’). Pinnacle Fund Services Limited ('PFSL') (ABN 29 082 494 362, AFSL 238371) is the product issuer of the Fund. PFSL is not licensed to provide financial product advice. PFSL is a wholly-owned subsidiary of the Pinnacle Investment Management Group Limited (‘Pinnacle’) (ABN 22 100 325 184). The Product Disclosure Statement (‘PDS’) and Target Market Determination (‘TMD’) of the relevant Fund are available via the links below. Any potential investor should consider the PDS and TMD before deciding whether to acquire, or continue to hold units in, the Fund. Links to the Product Disclosure Statement: WHT3810AU, WHT5134AU, WHT3093AU, WHT7794AU Links to the Target Market Determination: WHT3810AU, WHT5134AU, WHT3093AU, WHT7794AU For historic TMD’s please contact Pinnacle client service Phone 1300 010 311 or Email service@pinnacleinvestment.com This communication is for general information only. It is not intended as a securities recommendation or statement of opinion intended to influence a person or persons in making a decision in relation to investment. It has been prepared without taking account of any person’s objectives, financial situation or needs. Any persons relying on this information should obtain professional advice before doing so. Past performance is for illustrative purposes only and is not indicative of future performance. Whilst Firetrail, PFSL and Pinnacle believe the information contained in this communication is reliable, no warranty is given as to its accuracy, reliability or completeness and persons relying on this information do so at their own risk. Subject to any liability which cannot be excluded under the relevant laws, Firetrail, PFSL and Pinnacle disclaim all liability to any person relying on the information contained in this communication in respect of any loss or damage (including consequential loss or damage), however caused, which may be suffered or arise directly or indirectly in respect of such information. This disclaimer extends to any entity that may distribute this communication. Any opinions and forecasts reflect the judgment and assumptions of Firetrail and its representatives on the basis of information available as at the date of publication and may later change without notice. Any projections contained in this presentation are estimates only and may not be realised in the future. Unauthorised use, copying, distribution, replication, posting, transmitting, publication, display, or reproduction in whole or in part of the information contained in this communication is prohibited without obtaining prior written permission from Firetrail. Pinnacle and its associates may have interests in financial products and may receive fees from companies referred to during this communication. This may contain the trade names or trademarks of various third parties, and if so, any such use is solely for illustrative purposes only. All product and company names are trademarks™ or registered® trademarks of their respective holders. Use of them does not imply any affiliation with, endorsement by, or association of any kind between them and Firetrail.

1 topic

1 fund mentioned

Justin Gray
Portfolio Manager
Firetrail Investments

Justin is a Portfolio Manager at Firetrail Investments for the Firetrail S3 Global Opportunities Fund. Justin’s primary responsibilities include daily portfolio management, investment risk management, and fundamental analysis of global equities....

I would like to

Only to be used for sending genuine email enquiries to the Contributor. Livewire Markets Pty Ltd reserves its right to take any legal or other appropriate action in relation to misuse of this service.

Personal Information Collection Statement
Your personal information will be passed to the Contributor and/or its authorised service provider to assist the Contributor to contact you about your investment enquiry. They are required not to use your information for any other purpose. Our privacy policy explains how we store personal information and how you may access, correct or complain about the handling of personal information.

Comments

Sign In or Join Free to comment