I believe that over the next few decades, the UK shares with the leading Environmental, Social and Governance (ESG) credentials could be some of the best investments.
Moreover, I reckon companies with low ESG ratings will suffer as investors become more informed about corporate responsibility and the costs of polluting increase.
And with that being the case, I’d avoid UK shares with poor ESG ratings. Here are three companies I’d steer clear of for that reason.
UK shares to avoid
The group owns interests in and produces thermal coal predominantly from seven collieries located in Mpumalanga, South Africa.
Not only is coal one of the dirtiest power sources around, but the mining industry in South Africa has attracted criticism in the past for poor working conditions. As such, I believe the company has terrible ESG credentials and would avoid the stock as a result.
However, to its credit, the firm says it’s committed to advancing its ESG factors. To that end, it’s established an employee partnership and community partnership plan. And, of course, the demand for coal around the world is still high. This could mean the corporation’s outlook isn’t as bad as it first appears.
The other company I’d avoid is North Sea oil and gas producer Harbour Energy (LSE: HBR). The North Sea is one of the most expensive places to produce oil and gas in the world. This means companies like Harbour are at a disadvantage. At the same time, the group has a large amount of debt on its balance sheet.
According to the company’s own figures, free cash flow breakeven will be $30-$35 per barrel, and net debt is around $2.9bn. By comparison, some producers in the Middle East can extract oil for less than $7 a barrel.
I think these figures put Harbour at a disadvantage and, as the world moves away from oil and gas, it could begin to struggle.
That said, if oil prices remain elevated, the company could generate enough cash flow over the next few years to reduce its debt. This would put it in a strong financial position enabling it to invest for the future.
Despite this, I’d still avoid the company considering its ESG risks.
Disrupted business model
Carnival (LSE: CCL) is the world’s largest cruise company. Unfortunately, the cruise industry is notorious for poor working practices and pollution.
As such, I think the business has some of the worst ESG credentials of all UK shares. Further, the pandemic has decimated the group’s balance sheet, and it could take years to recover.
These are the primary reasons why I’d avoid the stock today. However, there are some green shoots of recovery on the horizon. The company has resumed some sailings around the world, and consumers have been happy to book trips. Carnival is also making progress in reducing its emissions.
Despite these brighter spots, I’d avoid the enterprise as I think the risks facing the business will far outweigh the opportunities over the next five to 10 years.
Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.