Corporate commitment to sustainability can boost a company’s reputation and is generally regarded as the right thing to do for long-term performance, but some firms are finding that the positive effects of their green strategies do not carry over to the world’s stock markets, where short-term returns still rule.
From a corporate point of view, there are many good arguments for accepting a temporary dip in profits while transitioning to more sustainable operations. But the markets are unforgiving of reduced profitability, no matter how temporary, because market sentiments are less focused on value outcomes further than a few months in the future. The average holding period of shares has reduced continuously over the last years and has dropped to around six months. Consequently, many listed companies are wrestling with the growing gap between their ambitions for lasting sustainability and the perceived fiscal risks of pursuing those ambitions.
Not all markets are equal when it comes to how they value the relevance of sustainability. In the US, there is a more laissez-faire approach and ESG has become a much debated ‘wokish’ topic. In Europe, ESG regulations are more actively affecting business activities and require companies to report extensively on their own operations and those in their value chain. Currently, organizations operating on the continent are held to higher environmental, social, and governance standards than in many other parts of the world. It is hardly surprising, then, that some companies exposed to EU regulations are looking across the Atlantic for more favorable conditions in less regulated markets.
Global oil giant Shell made headlines in April 2024 when it announced that it was considering quitting the London Stock Exchange for the New York Stock Exchange, on the grounds that its stock was ‘undervalued’ in London in comparison with New York-listed rivals Chevron and ExxonMobil. Clearly, Shell sees the potential to boost the share price with a listing in the US. The opportunity to reduce the external pressure on its overall emission reduction targets that such a move will provide is likely also a strong motivator.
In addition to abandoning more regulated stock listings, Shell has floated plans to give back about $75bn to investors over the next three years by means of dividends and share buyback. The impact of such payouts on Shell’s ability to finance energy transition measures is likely to be considerable. Another troubling issue is that while the company is achieving double-digit returns on fossil fuels, it is only seeing low single-digit returns on renewable energy, prompting investors to move their money into fossil stocks. This leads to the question of whether the oil majors are to transition from fossil into renewable or whether they simply need to transition out of fossil and let the shareholders use the distributions to invest in fossil alternatives. While we cannot be without fossil fuels immediately, the negative outcome of such a strategy could well be that the reduction in emissions will be delayed, with all the consequences for future generations.
Meanwhile, Swiss concrete manufacturer Holcim has indicated that it intends to pursue a complex strategy of establishing a separate listing for its US arm. This involves spinning off its US division into a separate company and then listing it in the US while maintaining its European listing. Estimates suggest that the spinoff could be worth $30bn. The announcement led to an immediate rise in the stock price in Switzerland. It would be interesting to see whether the US arm of Holcim has the same dedication to sustainability as the Swiss firm.