While Australian companies have already moved well ahead of the Government in trying to mitigate the medium- and long-terms risks from climate change, there is a big opportunity for Australian companies to participate in the growing demand for renewable energy.
According to a recent report by the Australian Energy Market Operator (AEMO), about A$320 billion in infrastructure investments will be needed by 2050 to develop, operate and maintain the generation, storage and future network investments of the National Electricity Market (NEM)1 . In the same report, AEMO also said that renewable energy will account for over 80% of the grid by 2030 and 96% by 2040.
Energy transition as a driver of returns
We have used our proprietary Carbon Value-at-Risk (VaR) research, which puts a cost value of Scope 1,2 and 3 carbon emissions to help identify ASX-listed companies within our investable universe that we believe have already embraced the transition to renewable energy.
As part of the Martin Currie Australia investment process, we have developed a Carbon Value-at-Risk (VaR) model to:
- help identify companies that have really embraced the transition to renewable energy,
- review the positive and negative impacts of renewables on normalised earnings that drive our valuations, and
- better asses individual stock and portfolio sensitivity carbon related impacts.
Our analysis takes into consideration the ability of a company to pass Scope 1, 2 and 3 carbon costs through to customers, and also how companies may be in varying stages of a transition pathway.
We also look conversely at how some companies will be left with stranded assets such as coal when technology advances to scalable renewable energy.
We have identified several ASX-listed companies that we believe have already embraced the transition to renewable energy.
Potential energy transition winners
So, which companies do we think will be central to the opportunities in renewable energy generation and infrastructure, or energy consumption over the next decade?
- The Australian Banks are essential to providing green finance opportunities to Australian companies to enable the carbon transition from fossil fuels to renewable energy. ANZ Banking Group, Westpac Banking Corporation, Commonwealth Bank of Australia and National Australia Bank are all very focused on Sustainable lending, with all four banks committed to phasing out any lending to thermal coal by 2030 and influencing their top 100 emitters to undergo a rapid transition away from fossil fuel to renewable energy. In total, the big four banks now have circa A$215 billion of committed sustainable finance initiatives by 2030. This includes affordable housing and low carbon projects.2
- Macquarie Group provides finance and private equity for large scale projects around the world. Macquarie has approximately A$30 billion of available finance that can be deployed into green capex/investment/renewable infrastructure and are already the largest investor in offshore wind farms in the UK.3
- New Zealand utilities predominately use renewable energy for their electricity generation, sourced from hydro, geothermal and solar, and are continuing to invest in the renewables space. These companies include Mercury NZ, Genesis Energy, Contact Energy and Meridian Energy.
- Worley is a major provider of project and asset services to the global energy industry. Worley benefits from the trend to renewables as new renewable infrastructure is required to be built and developed, replacing redundant capacity reliant on fossil fuels. Today around one third of their forward order book is for energy transformation/solutions.
- Monadelphous Group has a significant role in the construction of renewable infrastructure such as wind power, and in maintaining and transitioning old world infrastructure into new. This includes decommissioning oil and gas plants and the construction of more efficient renewable energy infrastructure.
- Mining companies which mine copper, such as Oz Minerals, are also beneficiaries of the move to fully electrified transport, especially cars and trucks as part of the focus on reducing emissions. Copper is a key metal for electric motors.
- Owners of shopping centres such as Scentre Group and Vicinity Centres are sourcing renewable energy via Power Purchase Agreements (PPAs) and building solar panels on roof tops.
The list of stocks above is not exhaustive. As we step closer towards a low-carbon energy system over the coming decade, we look forward to using our fundamental research and Carbon VaR investment tool to identify more ASX-listed investment opportunities that can leverage this very important transition to renewable energy and also generate long-term financial returns for our clients.
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The information provided should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the security transactions discussed here were, or will prove to be, profitable.
1 Source: AEMO (June 2022). “2022 Integrated System Plan For the National Electricity Market”. Available from https://aemo.com.au/-/media/files/major-publications/isp/2022/2022-documents/2022-integrated-system-plan-isp.pdf?la=en. Total based on AEMO estimates of $12.8 billion constituting about 4% of the total spend needed to 2050.
2 Source: Macquarie Research; 29 November 2021. “Australian ESG Equity Strategy: Banking on Net Zero” report.
3 Source: Macquarie Group; 28 October 2022. “2023 half-year result transcript”. Available from https://www.macquarie.com/assets/macq/investor/results-and-presentations/2023/macquarie-group-hy23-transcript.pdf
Regulatory information and risk warnings
This information is issued and approved by Martin Currie Investment Management Limited (‘MCIM’), authorised and regulated by the Financial Conduct Authority. It does not constitute investment advice. Market and currency movements may cause the capital value of shares, and the income from them, to fall as well as rise and you may get back less than you invested.
The information contained in this document has been compiled with considerable care to ensure its accuracy. However, no representation or warranty, express or implied, is made to its accuracy or completeness. Martin Currie has procured any research or analysis contained in this document for its own use. It is provided to you only incidentally and any opinions expressed are subject to change without notice.
The document does not form the basis of, nor should it be relied upon in connection with, any subsequent contract or agreement. It does not constitute, and may not be used for the purpose of, an offer or invitation to subscribe for or otherwise acquire shares in any of the products mentioned.
Past performance is not a guide to future returns.
The views expressed are opinions of the portfolio managers as of the date of this document and are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. These opinions are not intended to be a forecast of future events, research, a guarantee of future results or investment advice.
The analysis of Environmental, Social and Governance (ESG) factors forms an important part of the investment process and helps inform investment decisions. The strategy/ies do not necessarily target particular sustainability outcomes.
The information provided should not be considered a recommendation to purchase or sell any particular strategy/ fund/security. It should not be assumed that any of the security transactions discussed here were or will prove to be profitable.
Risk warnings - Investors should also be aware of the following risk factors which may be applicable to the strategy shown in this document.
- Investing in foreign markets introduces a risk where adverse movements in currency exchange rates could result in a decrease in the value of your investment.
- This strategy may hold a limited number of investments. If one of these investments falls in value this can have a greater impact on the strategy’s value than if it held a larger number of investments.
- Smaller companies may be riskier and their shares may be less liquid than larger companies, meaning that their share price may be more volatile.
- The strategy may invest in derivatives (index futures) to obtain, increase or reduce exposure to underlying assets. The use of derivatives may restrict potential gains and may result in greater fluctuations of returns for the portfolio. Certain types of derivatives may become difficult to purchase or sell in such market conditions.