 We present our in-depth integration of ESG factors for six companies where we can identify specific impacts  In our framework we see Telstra and NTT as ESG leaders, with a focus on energy and governance  Our valuation approach highlights the risk of regulatory intervention in China, South Korea and Japan Environment: a clear divergence in energy focus. Electricity makes up c99% of telco Scope 1 and 2 emissions. Telcos are already large users (Telstra and NTT use c1% of total electricity in their markets) and growth strategies may exacerbate energy demands. Telcos – notably in China and Korea – plan a rapid expansion of their data centre business, and continue to ‘densify’ 5G networks. Companies have very different energy strategies, disclosure and targets. Most are aligned with national targets – China telcos aim for peak emissions by 2030, and carbon neutrality by 2060. But others such as NTT and Telstra are well ahead of national plans. Telstra aims for 100% renewable energy generation equivalent to its consumption by 2025, by when it aims to be a top five energy reseller. Both Telstra and NTT target emissions reductions in excess of 10% per year, in contrast to low single-digits in Korea, and emissions that are expected to increase for other companies we cover.

Social measures – most telcos score well. The nature of the business means telcos are helping to narrow the digital divide, and promote rural inclusion. Telcos are also large employers: female representation and diversity is slowly improving in most markets, albeit from a low base.

Governance is a large swing factor in our valuation approach. If energy costs are one of the biggest new ESG factors for telcos, governance factors have long been recognised.

Governments want telcos to spend on new technologies and broader coverage, and cut prices for users. We reflect the propensity of governments to intervene by adding a market risk premium in our WACC calculation. We apply a premium in Korea, Japan, and also China (see our 23 November report Energy costs and growth strategy in focus).

Leaders and laggards. Telstra stands out in our research as a company that has comprehensively integrated ESG into its operations, targets, and standards. We believe it has an opportunity to develop new revenue streams in green energy, where it could establish a strong brand. The Japanese telcos have also made significant strides in a short time. In the China telco sector, we look for more clearly defined targets and an appraisal of the energy impact of new growth strategies.