Apple’s sustainability show cannot hide that bottom line is at the heart of its initiatives

APPLE launched some interesting iterations of its products at its Wonderlust event last week – including iPhones sporting more advanced chips, better cameras and titanium body shells; and Apple Watches that users can control by tapping their thumbs and index fingers together.

But the company also managed to grab everyone’s attention with a skit extolling its sustainability initiatives.

The five-minute-long parody depicts Apple chief executive Tim Cook and his team timidly providing updates on the company’s stated aim of reducing its carbon footprint to zero by 2030 to a brusque and impatient Mother Nature played by Octavia Spencer – who won an Oscar for best supporting actress in the film The Help.

As the Apple staffers earnestly recount the company’s progress in turning to clean energy, reducing water consumption and restoring forests, mangroves and grasslands around the world, Spencer’s scepticism gives way to grudging approval.

She is eventually won over when she is shown a number of Apple Watches, which the company claims are its first “carbon-neutral” products.

“I want to see you do more of this,” she tells Cook.

“You will,” Cook assures her, before repeating the company’s pledge that all its devices will have a net-zero climate impact by the end of the decade.

For some, Apple’s portrayal of itself as a corporate juggernaut answering to a higher power was a creative way of communicating its commitment to sustainability. For others, the skit was a cringeworthy advertisement for Apple’s latest products.

My own view is that Mother Nature should have pressed Cook on the real purpose of Apple’s sustainability initiatives. She may well have discovered what many market watchers already know – everything that companies such as Apple do is ultimately about boosting their earnings and the market value of their shares.

If the Covid-19 pandemic taught us anything, it is that carbon emissions and general pollution are directly related to economic activity. Amid the lockdowns around the world in 2020, air quality improved in some densely populated areas, and marine life flourished in some usually busy waterways.

Apple might do more for the environment if it simply rolled out upgrades to its iPhone less frequently, instead of planting forests in Paraguay and Brazil to offset the carbon impact of its business operations.

The capitalist world does not work that way, of course. Companies owe it to their shareholders to do everything possible within the confines of the law to grow their businesses and maximise their earnings.

Where does sustainability fit into this picture? What is the rationale for a company such as Apple to become carbon-neutral?

Across the world, governments are waking up to the risks of climate change and working towards introducing systems of accountability for carbon emissions.

Companies with thriving, carbon-neutral businesses will increasingly be viewed as being ahead of the curve and garner an advantage in gaining access to capital. This, in turn, could put them in a stronger position to fend off competitors and expand into exciting new fields.

Sustainability investing boom

One narrative I often hear from the fund management sector is that sustainability-oriented investing results in consistently higher returns – or, to put it more pithily, companies that do good often do well.

To be honest, I have never been entirely convinced of this. It seems to me that the causality might run the other way – that is, successful companies tend to have the financial resources to burnish their sustainability credentials.

Whatever the case, the supposedly superior returns from sustainability-oriented investing is fuelling a boom in this segment of the fund management industry.

Last week, Singapore Exchange (SGX) announced the launch of the iShares MSCI Asia ex-Japan Climate Action ETF. Managed by BlackRock and anchored by Prudential, the fund has assets under management of US$426 million – making it the largest equity exchange-traded fund (ETF) launched in Singapore.

SGX said the ETF will enable investors to gain exposure to best-in-class companies in the region that are committed to reducing carbon emissions.

Specifically, the ETF tracks the MSCI AC Asia ex-Japan Climate Action Index. Among the largest components of the index are TSMC, Alibaba, Tencent, Reliance, Meituan, Hong Kong Exchanges and Clearing, and DBS.

The index had delivered a year-to-date return of 2.13 per cent as at Aug 30, and was trading at 14.1 times forward earnings and 1.8 times book value.

The broader MSCI AC Asia ex-Japan index returned a marginally stronger 2.33 per cent during the same period; but it was trading at only 12.6 times forward earnings and 1.5 times book value.

A report by the Morgan Stanley Institute of Sustainable Investing said sustainable funds globally delivered a median return of 6.9 per cent in H1 2023, while traditional funds achieved a median return of 3.8 per cent.

In 2022, sustainable funds underperformed traditional funds for the first time in five years. One explanation for this was that the rapid rise in interest rates last year benefited value styles of investing. The report noted that only 10 per cent of sustainable funds take a value approach, compared with 22 per cent of traditional funds.

The report was based on Morningstar data and covered 96,000 funds globally. Morningstar classifies funds as “sustainable” if their prospectus or regulatory filings describe them as focusing on sustainability, impact investing or environmental, social and governance (ESG) factors.

Stay alert and nimble

What does all this mean for investors? How much emphasis should investors place on the sustainability narratives of companies?

Almost exactly two years ago, this column noted that the ESG theme was a powerful mobiliser of capital. It also expressed uneasiness about allowing self-interested investors and profit-maximising companies to determine appropriate climate action.

Looking back now, climate action was clearly not the market’s main agenda. For one thing, traditional oil companies outperformed the clean energy sector.

Chevron’s share price is up 20.4 per cent over the past two years, while ExxonMobil’s shares have more than doubled in value. On the other hand, the iShares Global Clean Energy ETF has tumbled 22.2 per cent.

This was due to a host of countervailing factors – not least among them the war in Ukraine, the rebound in oil prices and the rapid monetary policy tightening around the world.

Even as more and more companies work towards reducing their carbon footprint, investors should stay alert and nimble.

With simmering US-China relations, uncertainty over the direction of interest rates and the emergence of new technologies such as artificial intelligence, this hardly seems the moment to focus on a single investing theme – even one as powerful as sustainability.

As for Apple, the company’s admirable sustainability initiatives – including the recent skit featuring Cook and Spencer – will probably not be as potent a driver of its stock price over the next several months as sales of its newly launched iPhone 15.