How are the Granola stocks scoring on climate?
European stock market growth has been dominated by a handful of companies dubbed the “Granolas”, how are they scoring on net zero?
In 2020, Goldman Sachs analysts singled out 11 European stocks which were expected to act as key drivers for the continents’ stock market growth. Because financial analysts love a good acronym, they were dubbed the Granolas, linking the initials of GSK, Roche, ASML, Nestle, Novartis, Novo Nordisk, L’Oreal, LVMH, AstraZeneca, SAP, and Sanofi.
At first glance, the tale of the Granolas is very similar to that of the Magnificent Seven. Just as the Magnificent Seven have accounted for the bulk of stock market growth in the US, last year, the Granolas accounted for 60% of the Europe-wide Stoxx 600 index. Together, the Granolas currently represent almost a quarter of the Stoxx 600 benchmark index, they have become a force to be reckoned with in institutional equity portfolios. But how are they faring on climate?
The investment case
While both the Granolas and the Magnificent Seven are an indication of increasingly concentrated stock markets, there are also significant differences. For starters, the European Granolas represent a much more diverse set of sectors, ranging from pharmaceuticals over microchip producers to a luxury consumer brand. Interestingly, not a single energy company has made it in the list of growth drivers for the European equity market.
Moreover, the European stocks tend to be smaller in terms of market capitalisation and offer solid earnings growth at about half the volatility of the Magnificent Seven. With some analysts forecasting that most of European earnings growth come from this handful of companies, their approach to climate change and reaching carbon neutrality warrants closer examination.
Powered by renewables
For starters, all 11 companies have set a net zero target and all except for L’Oreal have signed up to the Science-based Targets Initiative (SBTi).
For the Granolas, the energy they consume is the crux of their operational emission reduction. Given their global scale and geographically dispersed production centres, they constitute a powerful demand driver for the global renewable energy industry.
Take for example, L’Oreal which aims to power 100% of its operations by renewable energy before 2025. A target, the company says is 91% achieved. L’Oreal has a global presence not only in product distribution but also manufacturing and sourcing. Its renewables story is inextricably linked with that of the geographies it operates in.
In 2019, the company announced that its Chinese operations were carbon neutral, powered by renewables. China was L’Oreal’s first successful carbon neutrality project. The success soon became regional. By 2022, it had achieved similar feats in Japan and South Korea.
Most Granolas have a significant presence in China - one of the world’s largest sources of both greenhouse gases and renewables capacity. Their transition plans, therefore, could be welcome news for Beijing’s. In March 2024, Astra Zeneca announced that it found a way to reduce its Chinese operational emissions by 80%, owing to a biomethane-based waste-to-energy innovation.
By 2030, most Granolas reckon they can power their production by renewables. Novo Nordisk achieved that target in 2020.
Their optimism also carries through to other companies. Astra Zeneca, Novartis and GSK are members of RE100, an industry collective pushing for renewable energy supply. “If RE100 was a country, it would be the world’s 10th largest in terms of electricity consumption”, says a new report by RE100.
Overall, the Granolas, not only in their own right but also in unison with their peers, are a powerful demand signal for global renewable markets.
Butterfly effect
Having said that, operational emissions reduction plans address Scope 1 and 2. For the Granolas, the devil of emissions reduction is in the supply chain. The Scope 3 emission reduction challenge is far more complex and consequential.
95% of Roche’s and Nestle’s GHG footprint is in their supply chain. Roche has an extensive supply chain spread across 6 continents and 150 countries. “We work with 60,000 suppliers globally to deliver life-saving medicines and diagnostics products. We’re supporting them to reduce their emissions, while ensuring we lead by example and reduce emissions from our operations”, the company says
ASML - the Dutch lithography product supplier to the global chip industry has a similar tale to tell. “A significant portion of our GHG emissions are generated indirectly in our supply chain, as we mainly assemble modules that we source from suppliers”, the company said in its latest annual report.
L’Oreal says supply chain sustainability leadership is part of its transition ethos. In March 2024, it was recognized as a global leader in that regard by CDP, a non-profit. “Our objective is to initiate the butterfly effect across the market in tackling climate change” said Audrey Izard, the company’s chief purchasing officer for indirect sourcing.
The butterfly effect could include nurturing partnerships and investing in technologies. For instance, Novo Nordisk is exploring a source strategy for sustainable aviation fuel to reduce its scope 3 emissions.
In addition for some Granolas, the supply chain conversation is inextricably linked to biodiversity. Nestle, for example, focuses on regenerative agriculture in its net zero roadmap. “Climate change is now a lived experience, not a future projection. For a company as dependent on agriculture as Nestlé, this matters – greatly”, says Rob Cameron, the company’s global head of ESG engagement.
Credit where its due?
While the Granolas agree on scaling up renewables and taking on the Scope 3 challenge, they differ on how they interpret the “net” in net zero. For some, such as GSK, it means investing in carbon credits and carbon offsets.
“We plan to secure carbon credits for the 20% emissions we estimate to have as residual in 2030, and for a maximum of 10% residual emissions by 2045”, says GSK’s climate report. The company’s faith in credits comes in at a time when their efficacy is surrounded by a fog of scepticism.
In its latest climate report the company says, ““We understand the scepticism around the quality of some of the existing carbon credits in the Voluntary Carbon Market (VCM). We aim to invest in high quality and high integrity projects”.
Others such as Roche are not convinced. “We will not rely on offsetting, such as purchasing reduction certificates or using forestry to absorb emissions. In this way we will achieve what we call ‘real zero’ emissions by 2050”, the company says.
This divergence could become more important as the Science Based Targets Initative (SBTi) to which most Granolas a signatory, is currently considering to allow carbon offsetting for Scope 3 emissions. This could trigger far greater willingness among firms to use such offsets. However, critics point out that it could also increase the potential for greenwashing.
Is the dominance of the Magnificent Seven bad news for your carbon footprint?
