Here’s an unusual idea: Buy Enbridge Inc. (ENB-T) shares – but not for the hefty dividend yield or the bullish opinions among analysts. Buy the shares because you are an environmentally conscious investor.
This may look like an unpopular position at first glance. The energy infrastructure company, best known for its network of oil pipelines stretching from Alberta to refineries in the United States, is often vilified by environmentalists. These critics associate pipelines with fossil fuel production and damaging leaks.
In particular, Enbridge’s Line 3 replacement project through Minnesota was held up for years by environmental concerns before state regulators finally approved it late last year. Environmentalists still oppose the project.
TC Energy Corp. (TRP-T), another pipeline company, has faced similar concerns over its Keystone XL expansion project. U.S. president-elect Joe Biden will reportedly kill the project over environmental concerns, as one of his first moves after inauguration.
Yet, investors who prefer to align their portfolios with ESG principles – that is, own shares in companies that score well on environmental, social and governance factors – may be surprised to learn Enbridge scores rather well. (Full disclosure: I own shares, but more because I am beguiled by the stock’s dividend, which is now yielding 7.6 per cent.)
Standard & Poor’s Financial Services last month awarded Enbridge with an overall ESG rating of 75 out of 100, which seems to line up nicely with the principles that underpin responsible investing: The rating is more than the average score of 71 (based on ESG ratings in mid-2020) and much more than a low score of 40 awarded to an unnamed oil and gas company.
Enbridge’s governance component was the highest, at 84 out of 100, largely because of strong oversight and transparency. And the social component was the lowest, at just 56 out of 100, owing to the impact of problems related to accidents and ruptured pipelines.
But the E is what’s key here for investors worried about fossil fuels: On environmental factors, S&P awarded Enbridge with a score of 61 out of 100. Okay, that’s not exactly a ringing endorsement, but it is accompanied with upbeat descriptions of the company’s environmental commitments.
S&P pointed out that Enbridge has a track record of setting and achieving greenhouse gas reduction targets. For example, the company has reduced direct emissions from its Canadian operations by 26 per cent from 1990 levels. Its goal is to reduce emissions by 35 per cent by 2030.
Part of its strategy for meeting these goals rests on investing in renewable energy. Enbridge has invested in 22 wind farms and seven solar energy operations, giving the company an encouraging profile.
However, can Enbridge win over ESG investors?
That question was addressed in a note last week from Citigroup, which surveyed investors’ views on pipelines (also known in energy jargon as midstream).
According to the survey, about 60 per cent of investors believe the sector will never appeal to ESG investors. And just 10 per cent expect renewable energy will add to midstream cash flow in a meaningful way before 2024.
“In fact, many believe it will never be able to meaningfully add to cash flow,” Citigroup analysts said in their note.
This could be a big issue. Assets tied to ESG investments exploded in 2020, rising to more than US$1-trillion globally by the first half of the year, according to Morningstar – no doubt underscoring companies’ efforts to raise their ESG appeal.
Enbridge can at least show off its ESG score. Investors who insist on avoiding all companies tied to fossil fuels might not be impressed. But anyone willing to focus instead on the company’s efforts to embrace renewables and cut emissions might find the environmental argument worth weighing.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.