Which sectors are more sensitive to ESG?

Summary 

  • ESG involves evaluating non-financial criteria, including business impacts on the environment and the society, to take investment decisions. 
  • Several sectors such as oil & gas, metals & mining, and power generation, which contribute to significant GHG emissions and has social implications, are more sensitive to the ESG metrics. 
  • Many service-focused operations such as banking and consumer services are not heavily exposed to the ESG risks.

In the wake of growing ecological sensitivity, a large pool of investors has busied themselves in cherry-picking stocks that fall into line with their values or global sustainability trends.

While the motivational factors can range from macro-level ecological trends to an individual’s moral imperative towards the society, the onus is on organisations to innovate consistently to be more at par with Environmental, Social, and Governance (ESG) Criteria of the investors.

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ESG analysis, wherein the investors apply non-financial factors such as the organisation’s environmental and social stewardship, have become a pivotal part of their investment decisions. For that reason, despite not being mandatory financial reporting elements, ESG metrics are increasingly being used with companies making disclosures or unveiling their standalone sustainability reports. 

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However, when it comes to ESG impacts on sectors, one size does not fit all. We continue to witness a varied impact across different areas, owing to the sectors’ exposure to environmental and social risks. As a result, some sectors are more sensitive to the global ESG radar. 

Oil & Gas Sector

The oil & gas sector is exposed to greenhouse gas (GHG) emissions with gases like methane (CH4) released during the operations. At the same time, the fuel produced from the industry also constitutes a significant proportion of global emissions.

Companies in the sector also face several financial and reputational risks resulting from the material increase in pollution when there are spills and leaks during transportation or water is excessively used or contaminated during production.

Plastics, another derivative from petrochemicals, owing to its negative environmental impact, generate further ecological concerns for the sector players.

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The oil & gas sector also poses several social risks as drilling activities and offshore harsh environmental conditions can have implications for its workforce. Moreover, disruptions caused by drilling and production activities impact nearby communities. 

The increased focus on green alternatives with a low carbon footprint, such as electric vehicles, continues to challenge the oil & gas sector which has powered the economies for decades.

Metals & Mining Sector

Mining activities impact the environment by releasing toxic elements into the air, water, or soil. In addition, the ineffective containment after mining activities and use of toxic fluids for varying metallurgical testwork alter and deteriorate the ecosystems. Apart from generating harmful pollutants, metals & mining operations are power-intensive and can affect water availability and electricity to communities. 

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Workers employed in the metals & mining sector may have to bear hostile environmental conditions while also facing the risk of occupational hazards from the use of large and dangerous equipment in the industry.

Mining sites are also exposed to several land disruptions impacting the nearby communities. Thus, the miners need to obtain several licenses though significantly contributing towards social infrastructure and associated developments. 

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Power Generation Sector

Power generation is another area on the global radar as the world is cheering non-renewable energy sources. Thermal power generation (coal) is exposed to GHG emissions and air pollution. Despite a low carbon footprint, nuclear generation is exposed to several environmental risks from nuclear waste storage.

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It can cause human catastrophes like Chernobyl Disaster if the plant and operations are not handled effectively. The social communities and the workers are continuously exposed to the growing risk from the sector, with the sector facing several cost and regulatory constraints. 

                       

Which Sectors Are More Sensitive To ESG?

 

The focus on reducing carbon footprint and the threat of nuclear leakage has increased political scrutiny on power generation operations. 

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The increasing pace of technological alternatives favouring the transition away from polluting energy sources has been a dominant trend. Against the current backdrop, the sector players must align their strategies and operations to better suit the needs of the sustainable world.

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Chemicals Sector

The chemicals sector involves significant water usage. The flora and fauna of the ecosystem can get impacted when chemicals are discharged into the water bodies due to extreme toxicity. In addition, raw materials and finished chemical products during transportation can face spillage, further intensifying ecological risks from the chemicals sector. 

While chemicals are a precursor in many high-growth areas, consumers are shying away amidst the changed perception of using chemical products and associated health concerns.

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Some of the other sectors exposed to ESG risks include technology hardware, automotive, agribusiness, and transportation sectors. On the other hand, many service-oriented sectors such as financial services, banks, and consumer services are not extensively exposed to ESG factors. 

In essence, sustainability is not just a catchphrase anymore as an increasing number of organisations innovate around conscious themes, often considered screening factors for gauging the credibility of the company. Arguably, while many players, especially in the sensitive sectors, are bearing the brunt of the changing global dynamics towards ESG norms, others have embraced such standards as an operating principle to foster a sustainable transition. 

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