Rethinking ESG Targets For Companies Like Amazon, Apple And Analog Devices

Sustainability has been sufficiently elevated in the public consciousness that the investor community is aligning its products to cater to its customers.  On the equity side, major investors such as Blackrock
have announced their intention to use sustainability as an additional guide towards investment decisions.  This push has also been reflected in the bond markets with concepts such as corporate green bonds.  The result is that every company in corporate america must now present  Environmental, Social and Governance (ESG) goals which are generally patterned on the sustainability goals developed by the UN.

The article “Transformational Goals in Corporate Strategy: A Review of the ESG Goals of 50 Global Companies” examines the nature of these ESG goals, and has some interesting observations:

  1. ESG is no longer a niche, but a bar to compete
  2. ESG goal-setting is now widespread among Fortune 250 companies.
  3. Transformational ESG goals are still rare.

Overall, most companies walk through a progression of looking through their own waste products (do no harm), examine methods for adding efficiency(minimize carbon footprint), and in rare situations, drive changes through their supplier chain. In the backdrop of these goals are governmental and NGO organizations who are struggling with very real problems of air pollution, ocean health, agricultural runoff, and others. With the formation of ESG goals, there are very interesting engagements happening between these entities. It is not unusual to see corporate leaders join NGO board of directors. In this world, sustainability is often defined as pollution control or carbon capture.  This is all very good, but one wonders if it captures the full picture or even more pointedly, whether the best levers exist on the proverbial tail end of the carbon pipeline. 

Overall, if one is an investor interested in sustainability, what is the right framing and rating system to evaluate investments ?

A relatively straightforward view of the major components of the carbon pipeline consists of:

  1. Demand for Energy driven by fundamental services
  2. Efficient and Carbon Minimized Transfer of Energy to productive use 
  3. Methods for dealing with the externalities (pollution) 

Interestingly, virtualization of fundamental processes in the economy may be the most powerful method for reducing demand because it attacks the biggest culprit of sustainability, the transportation system. Why ?

  1. Energy: Moving information takes orders-of-magnitude less energy than moving physical assets. This is especially true when the physical assets are cars or planes.
  2. Pollution: Transportation by its very nature is distributed, so pollution generation is distributed. Virtualization offers the energy consumption to be handled at utility scale with a flexible and increasingly renewable energy grid.

The live experiment of industrial scale virtualization has been the response to the Covid-19 crisis.  As “COVID-19: The Digital Economy Change Agent ?” discusses, the virtualization of fundamental processes has resulted in remarkable improvement in air pollution in cities such as New Delhi, Beijing, and even Los Angeles.  In fact, across-the-board, it has been remarkable how quickly the earth has recovered during this time of extreme virtualization. At a more muted level, the technologies enabled by Artificial Intelligence and Sensors(AI/IOT technologies) can enable dynamic processes which reduce demand for energy with concepts such as smart buildings.

Not all transportation processes can be virtualized, so the next most powerful driver to solve the problem is electrification. As discussed in “Sustainability, Transportation Electrification, and The Importance of Analog Designers,”  energy transfer from the electric grid (35%)  is quite a bit more efficient than that from the internal combustion engine(21%). Thus, there is a real advantage to transportation electrification whenever possible. 

Finally, one must handle the carbon already in the system and in this world techniques for carbon sequestration are key. With concepts such as “carbon farming,” one can use regenerative farming techniques capture carbon and also build more healthy biological ecosystems. Oceans in particular are a very interesting place to employ transportation technology as outlined in “Savings The Oceans With Transportation Technologies.”

Given this backdrop, the question at hand is:  Should the companies who are driving virtualization, electrification, and sequestration be handled differently from an ESG investor point-of-view ? 

After all, companies such as Amazon
, Apple
, and Analog Devices
significantly enable virtualization with cloud services, communications systems, mobile devices, and the internet. Companies such as Tesla
and broader semiconductor are driving transportation electrification and improvements to the core power electronics. Sequestration is somewhat new, but to do it at scale, one will require the sort of technologies which are used in the use of monitoring and automation for agriculture today.

The companies which provide these capabilities are impacting sustainability in a fundamental way as a part of their core business, and the impact of their core business has implications well beyond their company specific ESG goals. As an example, Amazon’s eighty page comprehensive sustainability report does not even mention the critical role AWS has in the virtualization process. It is very likely that AWS enabled virtualization has a bigger impact than the long list in the sustainability report.

Sustainability investors would be wise to build more accurate scorecards for ESG which account for the mega-drivers of virtualization, electrification, and sequestration in a framing of ESG effectiveness.

Note: This article is part of a three-part series:

  1. Sustainability, Transportation Electrification And The Importance Of Analog
  2. Rethinking ESG Targets For Companies Like Amazon, Apple And Analog Devices
  3. Saving The Oceans With Advanced Transportation Technologies

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