Earth Day Choices in a World of Sustainability Reports

Fifty years on, billions around the world now commemorate Earth Day, a day set aside with deliberate focus on the environment.  At that first Earth Day, that focus was on roadside trash and junk cars, water fouled by chemical waste and air polluted by gas emissions.  Things have not changed much.  Humans remain filthy, ignorant and venal, spewing out waste in astounding volumes.  However, the unfettered use of fossil fuels has added a new problem  -  one that is arguably more pressing than any environmental worry before.  Global warming through the emission of greenhouse gases has led to a climate crisis of unprecedented proportions  -  erratic and dangerous weather events, rising seas and massive desertification.

Business has finally been forced to acknowledge the voracity of scientists’ warnings that continued emission of greenhouse gases could doom the planet.  Of course, the abandonment of fossil fuels and the adoption of renewable energy alternatives cannot happen overnight.  Corporations are now being held accountable for their greenhouse gas emissions.  To prove their road maps to cleaner operations, many companies have chose to communicate to shareholders with the so-called ‘sustainability report’ or even the more encompassing ‘environment, sustainability and governance’ or ESG policy tome.

Several of the companies in the Crystal Equity Research coverage group have already published their versions of a sustainability report.  The most recent to come across our desks is the first such report by Evoqua Water Technologies (AQUA:  NYSE).  It 2021 Sustainability Report was published to coincide with this year’s Earth Day.  As a provider of water and waste water treatment solutions, Evoqua could benefit by a well-formulated environmental policy that could impress customers as well as shareholders. 

The Evoqua report was prepared using guidance from the Global Reporting Initiative Standards formulated by the standard setting organization of the same name.  Of course, GRI claims the most comprehensive reporting standards among the many frameworks that have popped up in the last few years.  GRI is funded primarily by a mix of fees from membership fees, corporate engagements, services and events.  The non-profit also gets as much as 40% of its budget from government and foundation grants.  GRI claims ‘thousands’ of reporting entities across over one-hundred countries are using its standards. 

Evoqua’s goals reveal the company is giving itself plenty of time and latitude to make good on change.  For example, there is a bow to water conservation with the goal of recycling more water than is withdrawn from water systems.  A laudable goal.  However, the company is taking well more than a decade to get there.  For an operation focused on water clean-up solutions for its customers, it would seem Evoqua would want to make the achievement of water recycling goals sooner rather than later.

Of course, water conservation is not the only aspect of environmental responsibility.  Evoqua management is also taking plenty of time to reach zero net greenhouse gas emissions  -  the year 2050.  Even some heavy polluters are trying to reach ‘net zero’ emissions by 2040 or even 2035.  With the goal posts set so far down field, Evoqua can take its time getting organized. 

Evoqua’s sustainability report pledges the adoption of science-based targets by next year in 2023.  An entire year just to decide if science is a good idea?  

Perhaps Evoqua leadership believes that since its products have a clearly positive environmental impact, it is not an imperative for the company’s operations to set ambitious sustainability targets.  Evoqua claims its products impact over 100 billion gallons of water every day.  While this is an impressive number, it seems that Evoqua’s competitive position could be enhanced by setting an example of zeal for environmental responsibility. 

In Evoqua’s case there does not appear to a financial excuse for not being more aggressive in cleaning up its operations.  At the end of December 2021, the company reported $162.1 million in cash in the bank.  Working capital was $272.5 million, which appears adequate to support the company’s revenue run rate near $1.5 billion.  In the year 2021, the company generated $191.8 million in operating cash flow, representing a sales-to-cash conversion rate of 12.7%.  The health cash situation at Evoqua is probably one of the factors that gives management the confidence to run with a bit of leverage.  The debt-to-equity ratio is 131.35. 

If the company needs to knock on the door at the capital markets, it has a good track record in the debt market.   AQUA currently trades at a multiple of 42.9 times forward earnings in the year 2022.  The generous multiple suggests a premium priced stock and a low cost of equity capital.

If Earth Day teaches nothing else, it is that respect for nature is an individual’s choice  -  voluntary and without need for a push or shove from government regulation.  Unfortunately, the wrong choice or a decision made too late will be summarily dealt with by nature, perhaps in ways that are not very pleasant for humans.  Nature is dealing with recalcitrant humans by creating unfriendly circumstances in our climate that could ultimately limit human populations.  If humans are not willing to keep the environment clean or practice conservation, nature will protect itself by reducing the threat presented by human presence.  There is no time to waste, individuals and corporations like Evoqua must step up with some speed to make change for the better environment  -  especially those companies that have been ‘dragging the corporate feet’.  

 

 

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.