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ESG Focus: Of Waste And Resources

ESG Focus | Sep 09 2020

This story features BINGO INDUSTRIES LIMITED, and other companies. For more info SHARE ANALYSIS: BIN

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future:

FNArena examines the latest financial reports from the waste-management industry, which stands to benefit from several ESG megatrends; and an update on Rio Tinto's Juukan Gorge and its implications for the resources industry, which stands at the opposite end of the ESG stick

-Waste-management stands at the megatrends crossroads
-Major waste companies showing different ESG approaches in August
-Juukan Gorge sounds a warning bell for resources sector

By Sarah Mills

Waste management is a key ESG theme and two of the ASX’s largest waste companies reported in August: Bingo Industries ((BIN)) and Cleanaway Waste Management ((CWY)).

Share prices for both rose sharply, despite both companies reporting broadly in line with market forecasts, albeit with Bingo Industries performing relatively best against expectations.

Both companies provide some interesting observations from an ESG perspective.

Cleanaway shares have outperformed Bingo Industry in the past year, possibly a reflection on its lower debt levels (given weak appetite for debt post-covid) and its lower price-earnings multiple, to trade above pre-coronavirus levels.

Bingo industry jumped roughly 25% leading up to and upon publication of its results, but its share price remains closer to its post-covid trough.

While Cleanaway was trading above fair value, Bingo Industries was trading below fair value, possibly explaining some of the discrepancy.

ESG milestones, joint ventures and expenditures

From an ESG perspective, it is possible that Cleanaway has also benefited over the year from its public tilt towards plastic recycling given the government is expected to heavily subsidise the industry to solve the national plastic pollution challenge after China abruptly withdrew its plastic recycling service.

The full government funding proposal has been postponed until the October budget.

Bingo Industries, on the other hand, may have been struggling under expectations of further capital expenditure as it pivots to a recycling model, and the perception that, without joint ventures such as those secured by Cleanaway, it might not find end markets for its recycled products.

While performing much better on the ESG metrics reporting than Cleanaway over the past year, the company seemed to suffer from a lack of more defined strategic positioning in terms of new strategic announcements. Bingo also seemed to be struggling to gain full market appreciation for its strategic vision.

Much of that changed with the FY20 results. Bingo Industries came out guns-a-blazing on the strategic ESG front, leaving Cleanaway looking like a tactical small-fry.

If investors didn’t get the picture before the presentation, the company left little room for confusion post the presentation.

Waste management industry stands at megatrends crossroads

Very few industries stand to benefit from the world’s major ESG trends as does waste management. 

Sustainability, the sustainable fourth industrial revolution, the circular economy, the plastic war, climate change and alternative energy sources, you name it, the waste management industry stands in a pivotal position to all of them.

The industry promises to be a huge beneficiary, once it transforms/reforms its business model.

Yet, up until Bingo’s FY20 Investor Presentation, the country’s leading companies have failed to demonstrate publicly they really understand the opportunity at hand. Possibly because of a reluctance (not to mention the cost) to restructure old business models to meet future demands.

Bingo turns in impressive sustainability report

Bingo Industries clearly signalled an understanding that the world is transforming to a circular economy; and that circularity/sustainability and ESG are key planks of its strategy going forward.

The company devoted the first several pages of its FY20 Investor Presentation to primarily strategic sustainability and ESG issues. Where the report was light on tactics, it was strong on strategy.

The company's FY20 achievements and key takeaways were headlined by:

  • Significant progress towards zero harm; and
  • Leader in sustainability and social responsibility

Upfront, Bingo Industries reported on resource recovery, education, recycling, employee engagement, renewable energy, female representation, sustainability reporting excellence, climate change, responsible sourcing, indigenous participation, charity and modern slavery.

From a strategic and operational perspective, the company reported on progress with recycling and earmarked vertical integration – a key 4IR and sustainability/circularity theme as a “secondary focus” and a key strategic enabler.

Its five-year strategy was underpinned by the “priorities” of zero harm, customer experience, sustainability, growth and innovation, and develop and retain talent.

Bingo seemed at pains to stress its ESG credentials and went to some details to benefit progress on vertical integration. Some cynics might say Bingo was keen to shore up institutional investment; but there could be no doubt about the clarity of its strategic vision.

In a relatively short report, the company goes to some length to point out trends in this space. It points to to COAG’s 2020 ban on waste exports, expecting this will force the development on the domestic recycling market; federal government recycled content targets for new developments; higher minimum standards for compliance (which should increase barriers to entry; the push to scale up and accelerate the development of the circular economy in Australia (the company expects it will benefit from the need for Bingo’s recycled content).

The company singled out regulation and vertical integration, key sustainability themes, as key growth drivers; as well as the development of the Recycling Ecology Park at Eastern Creek.

The flipside to this is the company’s lack of progress to date on securing end markets and ventures with key industry players.

In comparison, Cleanaway’s FY20 Investor Presentation was underwhelming, leaving the observer to think this company missed an opportunity to impress investors.

While, Bingo Industries’ report was strong on strategy and low on tactics, Cleanaway’s report read like a tactical hit list of projects delivered (not necessarily a bad thing).

Cleanaway also reported its maiden ESG scorecard stamped with “Delivered”, which, buried as it was deep in the report in small type (that this writer could not read on her laptop), made it appear as if the company were reluctantly ticking a box, rather than recognising ESG as a strategic opportunity.

Cleanaway’s report appeared to show no real comprehension of the enormous opportunity, not to mention structural change, ahead of the industry. Nor the chance to inspire investors. This may have been politic.

Cleanaway’s presentation did include one strong paragraph:

Our objective to drive a circular economy in Australia continues and in the coming years, we will pursue several key projects that are strategically important for our business.”

Cleanaway identifies two of these as its proposed energy-from-waste facility and the plastic pelletising plant in Albury – a joint venture with Pact Group ((PGH)) and Asahi Beverages.

The latter is more significant than it sounds, in that it demonstrates solid steps towards securing an end market for the company's products.

Investors don’t mind investing in the future, but they like to know where the money is coming from. Investors are aware that plastic recycling is likely to yield strong subsidy support from governments in the near and long term.

Restructuring the business model

While the waste management industry is one of the most interesting ESG spaces, its traditional business model is not geared to many of the challenges ahead, such as plastics recycling, and is essentially one of collect and dump. 

The industry doesn’t yet have the manufacturing skills or infrastructure to dominate this space, making it vulnerable to new entrants and new technologies.

This is why joint ventures with major industry players, and the internalising of manufacturing skills is critical to securing future revenue.

While large cap companies such as Bingo Industries and Cleanaway appear to have an advantage over smaller existing operators, much will depend on the strategic execution of the pivot.

Strategy during periods of structural change is critical and Bingo Industries in its report went to great lengths to clearly demonstrate to the market it understands the challenges and opportunities ahead. Bingo also sent a clear signal to ESG investors it understands what it is required to attract and maintain capital support.

But so is revenue, and Cleanaway appears to have the edge on that front, although a relatively small one.

Investors will be expecting joint venture activity and recycling contracts to accelerate as proof that the funds will be forthcoming – from both Bingo Industries and Cleanaway.

They would also be keeping an eye to any mergers or acquisitions which would beef up the companies' manufacturing infrastructure and skillsets. 

Rio Tinto’s Juukan Gorge incident a warning to resources companies 

Meanwhile, Rio Tinto ((Rio)) published its board review of the Juukan Cave destruction. The board blamed systemic failures in communication and information management since 2014, reduced pay for its executive team (roughly between $1 and $2m per executive and a GBP1m reduction in CEO JS-Jacques’ 2016 long-term incentive plan; and further pay penalties down the hierarchy for those found to be bearing some responsibility.

Rio Tinto's board pledged to enhance standards and oversight through a new Social Performance function, and embark on a cultural change program, the rebuilding of its relationship with traditional land-owners, greater resourcing for the Heritage division which will be reviewed in its sustainability audit, and greater interactions between Rio Tinto Iron Ore senior leadership and traditional owners.

The board and executives are set to appear before the parliamentary inquiry into the incident in September and the joint standing committee inquiry is due on September 30.

The chastisement of Rio Tinto appears to be a warning shot across the bow, and it appears the incident is being used as an example to other resources companies in Australia. 

Genuine penalties for the company, as in large financial recompense to traditional landowners, have to date been non-existent, so the cynical observer might say the destruction of the site paid dividends, literally.

Institutional investors have not and are unlikely to penalise the company for the event.

The resources sector has less opportunity to benefit as directly from ESG megatrends as does the waste management industry, and more to lose.

Resources will be needed to drive the fourth industrial revolution. But on the other hand, circularity will require more recycling and re-use/repurposing of existing resources, and most of the sustainability challenges will add to costs in the near term.

At an individual stock level, improvements in efficiency in areas such as water and energy useage will benefit investors, but the efficiency process is expected to be continual, requiring continual capital expenditure. At an inter-sector level, sustainability competition should see some companies emerge stronger than their peers.

And then there is the “S” in ESG – social, which offers few financial benefits to resource-sector investors, although it does offer some reassurance that if an organisation performs well here, they are also likely to perform well on other metrics and show a similar respect to shareholders.

For now, Rio Tinto’s destruction of the archaeological significant Juukan Gorge has gone relatively unpunished. Again, it was a warning shot across the bow, not just for Rio Tinto but all resource companies.

The real commitment of ESG investors on this issue is likely to be tested in the next major incursion on this front.

It would be difficult for institutional investors to let another incident pass without penalty. Then, ESG’s “S” metal will truly be tested, its ramifications stretching from the Pilbara to the Pilliga.

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