Vestas Wind Systems ESG Overview
Author: Neel Joshi | Editor: Shayna Leng | Published May 16th, 2020
Vestas Wind Systems is a Danish manufacturer, seller, service, and installer of wind turbines. Vestas occupies part of the clean energy sector, accounting for more than 17% of global base installations. More specifically, they are present in 83 different countries, generating a combined 132 Gigawatts of power - more than any other company. Vestas offers various types of Wind Turbine platforms, ranging from onshore to offshore Wind installations. Additionally, the company is bringing a new, more customizable wind platform, combining the technology of their 4MW and 2MW platforms to provide a more modular platform capable of fitting diverse market needs. The EnVentus platform is modular in its ability to respond to varying wind speeds, allowing turbines to maximize energy output in low-medium to high wind speed situations.
Suffice to say, Vestas is an industry leader.
Figure 1: Offshore Vestas installation
Being in the clean energy sector, Vestas is an environmentally focused company and is actively engaged in contributing in a sustainable and socially beneficial manner. Primarily, the product itself ‘displaces’ carbon emissions as a result of those using Vestas products not contributing to emissions by the use of conventional energy sources such as fossil fuels. The usage of Vestas turbines has already displaced approximately 1.3 billion tons of carbon dioxide emissions.
Vestas is also committed to transforming into a carbon-neutral company by 2030 without the use of carbon offsetting (meaning that the company will work directly to become carbon neutral rather than invest in other environmental projects to balance out their own emissions). Currently, the company has switched 35% of corporate vehicles to either electric or hybrid (with the goal of 100% of the vehicles to be sustainably fuelled by 2025) and has added 127 sustainably fuelled vehicles to their service fleet. Additionally, the company aims to reduce 45% of emissions in their supply chain by 2030. Vestas is also aiming to reduce waste in their products, with the goal of zero-waste wind turbines by 2040. Presently, 85% of wind turbine components are recyclable, with the company working towards the use of more recyclable materials for the other 15% of components.
Vestas ranks 37th on the Global 100 most sustainable companies and 2nd among their industry category of ‘electrical equipment and power systems, and only trails behind OSRAM. However, Vestas also competes partially with wholesale power companies such as Orsted (Rank #1). Not only does Vestas actively help displace carbon emissions through the products they produce, but they have also taken measures to actively reduce their ecological footprint.
Vestas receives 8/10 for environmental contribution.
Vestas employs people from over 100 different nationalities – cementing their place as a truly global company. They have also recognized an existing gender imbalance within their employee structure (even though said imbalance lines up with the usual imbalances seen in STEM fields). Hence, they are working to improve gender equality within hiring. The company aims to increase the proportion of women in leadership positions to 25% by 2025 and 30% by 2030. However, the current level leadership positions occupied by women at 19% are behind that of Orsted (sitting at approximately 20%).
Vestas aims to implement diversity and inclusion training in their leadership positions by the end of this year. Vestas has also opened themselves up to pay audits in 7 of their largest markets via Mercer to identify and correct pay inequities between gender and nationality. They also engage in socially responsible labor practices, appealing to the standards for labor and human rights, seeking to avoid the use/contribution to child labor, slave labor. Vestas also respects freedom of association and rights to collective bargaining- Vestas also expects this of their business partners. Additionally, Vestas has developed Ethicsline, an in-company whistle-blowing platform that allows employees and associates to file concerns in a confidential manner. Journalists are also able to raise concerns anonymously.
Vestas is also committed to improving employee health and safety, attempting- and succeeding to reduce their Total Recordable Injury Rate by 15% year-on-year. The TIRR is 3.3% and the Lost Time Injury Rate (LTIR) is 1.2%. Vestas boasts a lower TIRR than the 3.6% at Orsted.
Vestas has set goals of achieving a more diverse workplace, introduced equity auditing, in-company whistleblowing infrastructure, and a commitment to ensuring employee health and safety, however, current diversity figures indicate that achieving said goals is essential.
Vestas receives 7/10 for societal contribution.
The corporate structure of Vestas features a specific sustainability strategy department that ensures sustainability compliance throughout the company.
Figure 2: Governance structure:
Vestas also engages in anti-bribery and anti-corruption campaigns, being a signatory of the Partnering Against Corruption Initiative (PACI) as part of the World Economic Forum. Vestas further works to reduce exposure to the risk of bribery and corruption, extensively combatting this in their employee code of conduct. Vesta s also vets suppliers to ensure compliance in line with their sustainability goals, done through the use of third-party due diligence (a word should go here – processes?) within their supply chain. When it comes to lobbying, Vestas is part of the European Wind Energy Association. The EWEA is stated to have clear environmental goals when it comes to lobbying governments, compared to other environment-related industries such as organic farming. Similar companies such as Orsted also engage in the same lobbying practices as part of the same association. In general, Vestas is vested in sustainable governance, seen through their structure and practices relating to responsibility within supply chains and industry-standard lobby practices.
Vestas receives 8/10 for government contribution.
Financial and Growth Profile:
The stock price of Vestas is relatively stable, with a low level of volatility and minimal price swings. This is evident from its Beta of 0.88, indicating that volatility is below the benchmark of the wider market. The Beta is lower than the industry average of 0.96. A low level of volatility like this is beneficial for the share price during periods of decline or bear markets. Compared to Orsted, the Beta of Vestas is higher but closer to both the market benchmark and industry average, so when the market performs well, the potential for Vestas to perform well is higher than that of Orsted.
Vestas offers a price-to-earnings ratio of 44.53, this is slightly lower than the US clean energy sector average of 56, however, is also higher than Orsted’s comparable PE ratio of 34.76. The PE ratio has grown approximately 285% in the last 5 years; however, the ratio has also fallen approximately 56% since its peak in December of 2020. The aforementioned PE ratio may signify that the share price could be over-valued, however, in the context of PE growth we can see that this overvalued period may be coming to an end.
The EPS for Vestas is 5.78. This indicates a good level of profitability, however, the recent level of profit has dipped slightly (approximately 10%)- this could be attributed to the Covid-19 Pandemic. While profit levels may have fallen slightly in recent periods, the company’s revenue has increased by a substantial 20% (this is primarily due to increased business in American Markets). The Year-to-Date performance of Vestas is -19.3% (compared to Orsted’s -31%), however, this is coming off the end of a +225% bull run in 2020. This decrease is correlated with other stocks within the clean energy sector, a majority of stock enjoyed large increases in their share price. It seems that the sector is reeling from this bull run so far into 2021. A second bull run may be on the horizon, with a 33% gain since a 6-month low of 55.78 in early March.
Vestas Receives 6/10 for Profitability
As mentioned earlier, company profits have increased substantially due to increasing orders for Wind Turbine installations in North America. Room for growth is also evident in the incoming proposals of the Biden administration. The Biden administration is aiming to conduct mass spending on the clean energy sector to develop clean energy sources for the US. Vestas already has a history of working in the US, with the completion of 22,153 Wind Turbine installations, accounting for 28.75% of the company’s business. This combined with the Biden administration's increased focus on the wind energy sector is ripe for potential growth, with some of the planned infrastructures and clean energy spending potentially going to the installation of new turbines, possibly contracted out to Vestas. With proposed spending nearing $2.25 Trillion the potential for future wind energy installations is bright. Vestas is on its way to being a common holding in other ESG portfolios, boasting a low ESG risk rating of 16, within the 10th percentile of risk. It is also the highest holding in the iShares Global Clean Energy ETF (with approximately 8.6% of the ETF’s holdings).
Vestas receives 8/10 for future growth.
Conclusion: In conclusion, Vestas is currently one of, if not, the largest wind turbine producer/manufacturer/installer within the market- in a time where the world is embracing clean energy. In terms of an ESG outlook, Vestas excels in its environmental profile, with concrete goals to improve its sustainability through zero-offsetting carbon emission reductions. Vestas also works within a market that seeks to displace carbon and is therefore sustainable in and of itself. Additionally, Vestas is rated well in terms of its governance, specifically, due to its ethics line program, anti-corruption measures and, sustainable lobbying practices. While these aspects of Vestas’ ESG profile are strong, there is room for improvement in their societal contribution. This is mainly due to their relatively low levels of diversity at the management and leadership positions- specifically to do with gender imbalances. In terms of financials, Vestas holds a relatively decent PE ratio, EPS, and market Beta (indicating relatively little volatility). Additionally, the recent performance of share price (2020-2021) shows a large bull run for most of this period, with a current period of downturn, however, this is in line with most other stocks within the sector. Vestas also is held by one of the largest clean energy ETFs - iShares Global Clean Energy ETF. With a potential recovery from 2020 highs and room for growth with promising deficit spending on behalf of the Biden administration, Vestas looks to continue growth into the latter half of 2021. It is the opinion of the author that Vestas has the potential to be an ESG-friendly, long-term hold.
Total score: 37/50
Weighted Score: 7.4/10
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