When we evaluate a company’s environmental, social and governance (ESG) factors for potential investment, a business segment that is reliant on fossil fuel industry customers is typically disqualifying. But not long ago, as we looked ahead to a reopening economy and the prospect of an increased push for sustainable infrastructure, we took a closer look at a company with such a segment, and were surprised by what we found.
Emcor’s primary business lines are in electrical and mechanical construction, facilities maintenance and services, which together accounted for 91% of the company’s revenues in 2020. But the remaining 9% of Emcor’s 2020 revenues were in industrial services, which the company acknowledges are “largely performed for refineries and petrochemical plants.”
A closer look, however, reveals a more nuanced picture of the company’s operations, even within Emcor’s industrial services segment. Among the services Emcor provides to its oil and gas customers are those that increase energy efficiency and safety. To take one example, an Emcor subsidiary recently developed an innovative technique for cleaning heat exchangers used in refinery and chemical plants. The technique enables customers to save significant amounts of water; Emcor claims it is the only heat exchanger cleaning method that recycles cleaning water. Before the method was developed, heat exchanger cleaning consumed almost 1,200 gallons of fresh water per minute, which was then discharged into sewers. Beyond efficiency, Emcor even hints at future deployments of carbon capture and renewable energy projects for oil and gas customers.
Our research into Emcor’s main business lines was even more encouraging. In comparison to the company’s $79 million in remaining contract value from oil- and gas-related projects, its aggregate contract value for renewable energy projects as of 2020 was $177 million. Emcor’s renewable energy expertise includes solar, photovoltaic, wind, fuel-cell, biomass, landfill gas, tidal, and biofuel-fired generation. The company has been a Gold member of the US Green Building Council since 2005, and in 2020 completed 70 projects that were certified to sustainability standards such as LEED (accounting for just over 7% of 2020 revenues). Emcor has also helped several large companies design and construct carbon neutral facilities. And the company’s facilities maintenance and services segment includes efficiency-focused services such as energy audits, water conservation retrofits, lighting retrofits, and building automation systems installation.
Emcor’s stewardship over its own emissions is improving as well, through Sustainability Accounting Standards Board (SASB)-aligned reporting and audits by the independent firm EcoVadis. The company has set a target of a 20% reduction in per-capita greenhouse gas (GHG) emissions by 2035, along with a 30-40% reduction in fossil fuel consumption by the same time. We view this as a good starting point, although since Emcor improved its emissions tracking in 2020, we will be seeking for the company to make its targets more aggressive in the years to come.
In other areas of its business, Emcor says it experienced less than half its peer’s average of recordable safety incidents for the twelfth straight year in 2020. The company voluntarily reports workforce diversity statistics, and while its very low 11% of employees who are women put it on par with the rest of the construction industry, its 31% of racially and ethnically diverse employees, compared to the industry average of 11%, put it well ahead by that measure. Nevertheless, Emcor has clear room for additional improvement in terms of workforce diversity, while its board makeup also includes targets for change, including its non-independent board chairman and low 22% female representation and 11% representation of persons of color.
Taken on balance, we believe the positive aspects of Emcor’s environmental and social profile, and particularly the opportunity for environmental benefit in the vast majority of its business segments, more than outweigh the negatives in its remaining industrial services business segment. For us this makes an ideal setup for corporate engagement: a company whose environmental sustainability in its products and services is growing, but with the opportunity for even more progress given the right amount of encouragement and pressure from investors like us.