ČEZ Group: A mine reclamation case study

Climate change adaptation is crucial for asset managers to understand which issuers are prepared for future risk events, as this impacts creditor fundamentals. Investors can achieve compelling returns while supporting companies committed to sustainability, such as ČEZ, which focuses on decarbonization and biodiversity protection. A thorough understanding of both potential risks and relevant mitigation measures is essential for achieving excellence in impact investing.

Introduction

Franklin Templeton Fixed Income’s (FTFI) eight sustainability analysts, which are fully integrated within the European fixed income investment team, examine a variety of financial and non-financial considerations throughout the investment and portfolio construction process. A corporation that reduces its impact on the environment and works towards the mitigation of climate change is particularly interesting for our analysts, who continuously look to allocate funds not only to achieve a compelling financial return for our clients, but also to have a positive impact on the environment and society as a whole. Moreover, we believe that understanding all of the risk factors that may impact an investment—including environmental risks—is crucial for long-term investment success.

Consequently, we present our readers with a case study of one of our portfolio holdings, the Czech energy company ČEZ Group, to illustrate what is important to our FTFI sustainability analysts and why.

The case study

The Czech Republic is targeting a complete reduction of the use of coal for electricity and heat generation by 2033.¹ Accordingly, the ČEZ Group, an integrated energy conglomerate that is majority-owned by the Czech government, has some strict (SBTi approved) long-term goals to achieve climate neutrality by the year 2040.

At the same time, the Czech government understands the importance of biodiversity in helping to mitigate climate change, which is why companies that destroy a local ecosystem must rebuild this elsewhere. ČEZ still operates two open-cast mines, which necessitates the recreation of landscapes—including all of their original functions—and their integration into the surrounding environment. In 2023, the company completed reclamation projects on almost 120 hectares of land and began regenerating another 50 hectares.

In order to fulfil the requirements to the highest standard, before quarrying can begin, all protected animal and plant species are mapped so that they can be relocated to the reclaimed area.

FTFI’s sustainability manager, Kasper Hanus, wanted to learn more about the process, and therefore visited the Bílina and Nástup Tušimice mines. He learned that the reclamation process restores land that has been disturbed by mining into both farmland and natural ecosystems for endangered species. The area that has already been restored includes diverse terrains, such as forests, fields and wetlands, even rocks for amphibians to warm themselves in the sun or dried tree branches to be used as vantage points for birds of prey. These landscapes are specifically engineered to serve the needs of the endangered species that find their new homes there.

Besides the obvious environmental and ecological benefits, the area—part of which is publicly accessible—provides ecosystem services such as natural recreation. Meanwhile, having kids from local schools help with transporting little fish or frogs increases social engagement and raises awareness around environmental issues.

There are, however, some challenges facing ČEZ’s regeneration efforts. These include the introduction of invasive species into the habitat, either unwittingly or when lakes are stocked with fish by local anglers. Local governments have also been known to let roads run through the area, which not only leads to fragmentation of the habitats but also poses the risk of car accidents for the animals that live there.

What does this mean for investors?

Climate change mitigation and the protection of biodiversity are key priorities for impact investors, but so is the wish to achieve a compelling return on their investment. Our analysis in this area confirms our belief that an investor can achieve all of the aforementioned goals without compromise.

ČEZ is a leading energy company, a monopolist in Czechia, with presence in multiple other European countries. The position that the company holds, supported by the state being its largest shareholder, enables it to focus on introducing the necessary innovations to make the energy sector more sustainable. It’s important to note that there are multiple synergies at play here. Not only will ČEZ exit coal mining in the next decade, the transition will also provide additional benefits to the environment considering the company’s focus on protecting biodiversity. On top of this, the aforementioned nature-related tourism and recreation will be favourable for the local community and economy and could even create new jobs for out-of-work miners in the support of a just transition.

This is where best-in-class impact investing comes in, not just choosing the same green bond that was chosen by most other market participants but finding those investments that have additional upside potential. In the case of ČEZ, an investor buys a company’s bonds at a price that is weighed down by its coal producing assets, while keeping in mind the possible risks attributable to its fossil fuels-related business.

However, by understanding the details of an issuer’s commitment to decarbonization (as well as the risks involved), an investor can provide the financing for a positive change, and also earn an interesting financial return by participating in a company’s sustainability journey.