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SKAGEN Global: ESG an important piece of the puzzle

The reason is simple: a company is likely to deliver shareholder value for decades if – and only if – it operates in a manner that benefits all stakeholders in its wider ecosystem. We consistently encounter companies that bring gains, sometimes considerable, to some players in the ecosystem but largely sidestep other constituents. In the short run, these companies may be able to downplay or outright disguise some of these ill-conceived practices and still see a rising share price. Eventually reality catches up with them, however, at which point they typically face a brutal reckoning.

It is for this reason that SKAGEN Global strives to shine a light on its portfolio companies from different ESG angles to spot any cracks in the façade early on. Considering how rare it is to identify companies with the desired attributes, is it not reasonable to bestow a premium on the few who truly stand out from the crowd?

Waste Management: solid ESG credentials

One of our investments that has demonstrated solid ESG credentials over time is Waste Management (WM), North America’s largest provider of comprehensive waste management and environmental services. With roots dating back to 1968, WM now has a market cap just north of $60 billion and 45,000 employees serving over 20 million customers. The business model of waste collection, recycling and disposal is straightforward, but the equity story also features several ESG aspects that in our view remain underappreciated. One of them is landfills.

WM is the largest operator in the industry with 263 active solid waste landfills. At first glance, operating landfills under environmentally safe conditions may seem like an unglamorous and thankless task that only comes with downside risk. We do not share this perception. On the contrary, we think running landfills with strict environmental protocols is a valuable contribution to society. Under certain conditions it can also be a fine business model. The reputation risk is obviously real but must always be put in perspective. It is equally important to communicate how landfills relate to sustainability. One multi-faceted example includes renewable energy where WM's landfills have several touchpoints with existing and emerging technologies.

Disposal of wind turbine blades: a critical role

First, the deployment of wind power stations has exploded across the globe in recent years. Many parts of a wind turbine can easily be recycled after the plant reaches the end of its typically 25-year useful life – but not the blades. The giant turbine blades are made of fibreglass and can reach up to 100 metres in length. Recycling technologies for the blades are under development but are not yet economically viable at scale, so the de facto solution today is simply to chop up and bury the old blades. WM is therefore the last integrated part of the value chain for wind energy as its landfills become the final resting place for worn out blades. This role is critically important because the combined volume of decommissioned blades in Europe and the US already exceeds 10,000 per year, a number that will likely rise materially in coming years given the massive build-out of wind power.

Landfill gas: a renewable energy source

Second, landfill gases can be extracted for electricity and renewable natural gas (RNG) production. Organic material in the landfill decomposes and generates methane that is then collected through wells in the ground and routed to an RNG processing facility. This biogas is classified by the US Environmental Protection Agency as a renewable energy resource. It has the unique advantage of providing the electricity system with baseload-like capacity since it does not vary with wind or solar conditions. Creating a closed-loop, WM's collection trucks increasingly use RNG instead of diesel as fuel. Compared to the 2010 baseline, WM has reduced its fleet emissions by 36% and currently around 30% of the routed fleet run on RNG.

Further highlighting the potential of this energy source, WM recently announced a plan to invest over $800 million between now and 2026 to expand its footprint of RNG facilities. As an aside, it is worth noting that WM has started piloting an electric collection truck where weight limits have so far exceeded the capabilities of existing battery technologies. In terms of electricity generated from the landfills, WM is the largest gas-to-energy operator in the US and generates five times more clean electricity than it uses for internal consumption. The leftover electricity is used to power more than 460 000 homes in local communities.

A commendable mindset

We recognise that these ESG initiatives comprise a small part of WM's $15+ billion in annual revenue, but they nonetheless illustrate a mindset that we find commendable. It is imperative that companies communicate ESG initiatives without embellishing their actions. Under the successful leadership of CEO Jim Fish, WM has struck a good balance not only in communicating the overall strategy, but also in operating the business in a commercially responsible manner with value accruing across multiple dimensions while collecting trash for cash.

Read our Annual ESG Report

In SKAGEN, we strive always to keep a firm grasp on reality. Our Sustainability Report for 2021 details the nuts and bolts of our active engagement activity. Working together with portfolio companies is arguably one of the very best ways to achieve real change and improvement, and more sustainable investing.

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Annual ESG Report: Investing for financial gain and sustainability

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