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During our original analysis of Anglo American, we concluded that Anglo's equity valuation was negatively affected by poor sustainability credentials including concerns around employee welfare policies, lack of commitment to reduce Greenhouse Gas (GHG emissions) and exposure to thermal coal (used in power stations). Through our bottom-up stock analysis, we identified that if Anglo American had a systematic plan to address these ESG risks, this would lead to less downward pressure on Anglo's equity valuation; this potential was encapsulated with an S-PVT S3 rating[1].
Through being shareholders in this company and annual engagement meetings, rather than excluding because of thermal coal interests, we reinforced the thesis that improvements to its sustainability credentials not only contributes to a more sustainable future but also creates value. We were early supporters of the new management team when it was appointed in November 2015, since then not only has the share price recovered strongly, management has delivered on improving operational efficiency in line with environmental and social considerations.
Until the end of 2020, Anglo American was rated BBB by MSCI reflecting, amongst other issues, its lag in addressing its thermal coal exposure. In December 2020, Anglo American was upgraded to an A reflecting its improvements in risk mitigation around its mining activities. However, we still felt it important to keep the pressure on management to de-merge its South African thermal coal assets before changing our S-PVT rating.
During our engagement with Anglo American during 2020 and 2021 we observed considerable improvements in 1. People - health and safety standards (although there are still outstanding steps to be taken), commitments to support local communities with clearly communicated strategies 2. Innovation the FutureSmart Mining™ initiative e.g., patented technology to support less water usage 3. Environment – divesting thermal coal responsibly and best-in-class within the sector for net zero targets with a target of net zero operations by 2040. In April 2021, Anglo American confirmed the de-merger of its South African thermal coal assets – a solution that struck a sensible balance of responsibility and financial market pragmatism - we upgraded the S-PVT rating to S2.
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[1] Further information about River and Mercantile’s S-PVT rating process can be found on our website here
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The information in this case study has been prepared and issued by River and Mercantile Asset Management LLP (trading as “River and Mercantile” and “River and Mercantile Asset Management”) registered in England and Wales under Company No. OC317647, with its registered office at 30 Coleman Street, London EC2R 5AL.
River and Mercantile Asset Management LLP is authorised and regulated by the Financial Conduct Authority (Firm Reference Number 453087) and is registered with the US Securities and Exchange Commission as an Investment Adviser under the Investment Advisers Act of 1940.
This case study is directed at professional clients. The information in this article should not be relied on or form the basis of any investment decision.
Please note that individual securities named in this case study may be held by the Portfolio Manager or persons closely associated with them and/or other members of the Investment Team personally for their own accounts. The interests of clients are protected by operation of a conflicts of interest policy and associated systems and controls which prevent personal dealing in situations which would lead to any detriment to a client.