Moreover, I reckon companies with low ESG ratings will suffer as investors become more informed about corporate responsibility and the costs of polluting increase. 

And with that being the case, I’d avoid UK shares with poor ESG ratings. Here are three companies I’d steer clear of for that reason. 

UK shares to avoid 

The first to avoid for ESG reasons is Thungela Resources (LSE: TGA). The firm was recently spun off from its former parent Anglo American, which was looking to tidy up its portfolio of mining assets.

The group owns interests in and produces thermal coal predominantly from seven collieries located in Mpumalanga, South Africa.

Not only is coal one of the dirtiest power sources around, but the mining industry in South Africa has attracted criticism in the past for poor working conditions. As such, I believe the company has terrible ESG credentials and would avoid the stock as a result. 

However, to its credit, the firm says it’s committed to advancing its ESG factors. To that end, it’s established an employee partnership and community partnership plan. And, of course, the demand for coal around the world is still high. This could mean the corporation’s outlook isn’t as bad as it first appears. 

High costs

The other company I’d avoid is North Sea oil and gas producer Harbour Energy (LSE: HBR). The North Sea is one of the most expensive places to produce oil and gas in the world. This means companies like Harbour are at a disadvantage. At the same time, the group has a large amount of debt on its balance sheet. 

According to the company’s own figures, free cash flow breakeven will be $30-$35 per barrel, and net debt is around $2.9bn. By comparison, some producers in the Middle East can extract oil for less than $7 a barrel. 

I think these figures put Harbour at a disadvantage and, as the world moves away from oil and gas, it could begin to struggle. 

That said, if oil prices remain elevated, the company could generate enough cash flow over the next few years to reduce its debt. This would put it in a strong financial position enabling it to invest for the future. 

Despite this, I’d still avoid the company considering its ESG risks. 

Disrupted business model 

Carnival (LSE: CCL) is the world’s largest cruise company. Unfortunately, the cruise industry is notorious for poor working practices and pollution. 

As such, I think the business has some of the worst ESG credentials of all UK shares. Further, the pandemic has decimated the group’s balance sheet, and it could take years to recover. 

These are the primary reasons why I’d avoid the stock today. However, there are some green shoots of recovery on the horizon. The company has resumed some sailings around the world, and consumers have been happy to book trips. Carnival is also making progress in reducing its emissions. 

Despite these brighter spots,  I’d avoid the enterprise as I think the risks facing the business will far outweigh the opportunities over the next five to 10 years. 

The shares listed at 150p and have since been on a wild ride. After plunging to around 111p, the stock then bounced back to 151p. It seems as if the market can’t make up its mind whether it likes the business or not.

It’s easy to see why. Thungela owns interests in and produces thermal coal predominantly from seven collieries located in Mpumalanga, South Africa.

While these mines are among the highest quality thermal coal mines in South Africa by calorific value, the environmental costs have forced many investors to move away from the sector in recent years. 

ESG commitments 

For its part, the company is committed to enhancing its environmental, social and governance (ESG) factors. It has established an employee partnership and community partnership plan. Management also claims the group has a robust ESG framework in place, which underpins its licence to operate. 

However, specialist short-selling firm Boatman Capital Research has claimed the company is underestimating its environmental liabilities. Thungela has set aside around $468m for end-of-life mine rehabilitation costs.

But Boatman claims that new rules, known as NEMA 2015, will impose more demanding and more expensive environmental standards on miners in South Africa. The new rules are set to take effect in June 2022, delayed from the original date of June 2021.

Under these new rules, the short seller claims the total end-of-life environmental costs could be more than three times higher than Thungela’s owns estimates. 

As well as this uncertainty, there’s also a great deal of uncertainty surrounding the future for coal as a power source. The world is rapidly moving away from its use. Clean energy sources are quickly becoming cheaper and more efficient. As such, it’s difficult to predict how the demand for coal will evolve over the next five to 10 years.

What’s more, the company won’t remain a FTSE 100 constituent for long. It’s moving from the UK to South Africa this week, with its primary listing in Johannesburg. After the move, it won’t be eligible for inclusion in the FTSE UK indices.

Uncertainty surrounding Thungela Resources shares

All of the above makes it incredibly challenging for me to place a value on Thungela Resources shares. 

Still, short-sellers aren’t always correct. Boatman’s analysis of the company’s liabilities may be overstating the true picture. If that’s the case, the group could become a cash cow if its high-quality mines start throwing off profits. 

Indeed, coal is still being used heavily across the developing world as an energy source, although it’s not clear how much longer this will last. Nevertheless, if current demand levels persist, management is confident the company’s high-quality assets can produce cash flow to support attractive dividends.

Thungela Resources shares may be suitable for some investors with a high-risk tolerance who are happy to have exposure to the coal sector. Personally, I’d rather put my money to work in businesses with a more predictable outlook. Therefore, I wouldn’t buy Thungela Resources shares for my portfolio today.