In defence of natural gas: an ESG perspective

MCAInDefenseOfGasAbstract

The challenge is to ensure the transition to renewable energy continues, and remains sustainable in the future

As part of our focus on ESG1, Martin Currie Australia looks at what companies are doing to reduce emissions, improve air quality and mitigate the ever-present risks of greenhouse gases and climate change, and how that could impact long-term investment performance.

However, Australia’s energy mix cannot consist of renewables alone, and we believe that natural gas has a role to play in the transition to a lower carbon future. As such, while we screen out thermal coal from Ethical Income portfolios, we do not advocate for a binary view on the exclusion of all fossil fuels right now.

Removing thermal coal lowers carbon footprint

As discussed in a focal point in July last year, based on client feedback, in April 2019 we screened out all coal related activity, including the mining, extraction, transport and burning of thermal coal for power generation, from our Martin Currie Australia Ethical Income portfolios.

While we do like AGL for its moves towards renewables, it is excluded from Ethical Income due to its current coal use in the power generation mix.

In its place, we have invested in substitutes such as New Zealand utilities which generate largely renewable energy. This includes Contact Energy, which generates 80% of its power from geothermal and hydro2. We also invest in natural gas producers such as Woodside Petroleum.

Annual carbon emissions of key stocks3

Our substitutions have contributed to the significantly reduced carbon footprint of our portfolio when compared to a broader Australian market index such as the S&P/ASX 200.

Carbon emissions of Ethical Income4

Gas is an important lower emission alternative to coal

A key question we often get in relation to reducing emissions is why we do not exclude Woodside Petroleum from Ethical Income portfolios, given it has the highest emissions of any one stock in the portfolio. In fact, Woodside is a ‘top three’ position in the strategy5.

We are fully aware that Australia’s energy mix cannot consist of 100% renewables alone. Natural gas is a much lower carbon emitting fuel than coal or other fossil fuel alternatives for base load electricity generation, and we see that it can help to reduce the overall carbon intensity of electricity generation over time.

Carbon intensity of different fuel types6

Gas is already part of the solution globally

In fact, the International Energy Agency (IEA) have released data that shows that the transitioning from coal to gas has already significantly helped slow down the growth in emissions.

The following chart shows the CO2 savings since 2010 where countries have increasingly used gas as an alternative to coal.

CO2 savings (Mt) from coal-to-gas switching7

Chart 4 CO2 savings chart

While specific data for Australia isn’t available, the US is very significant in this context given the commercialisation of coal seam gas reserves over the last decade, and China, given its size.

Gas is part of the fight for cleaner air in China

My colleague Daniel Fitzgerald discussed the "Greenification” of China in a recent focal point, and how cleaner air is now a key priority for Chinese officials. The IEA report also shows that monthly gas consumption is rising quickly in China, and this is helping to improve the overall air quality.

Air quality for China’s “2+26” cities8 versus monthly gas consumption9

Chart 5 Air quality chart

Tools to assist in documenting the transition

MSCI ESG Research has been providing insight and analysis on ethical screens for over 20 years. As of 2018, they have been providing Low Carbon Transition Scores for each company. This considers the extent to which companies are currently exposed to the transition to a lower carbon economy, and how they are managing the risks and opportunities in the ongoing transition.

MSCI Low Carbon Transition Score scale10


In Defense Of Gas Low Carbon Transition

Using this scoring database, we can measure the progress of our Ethical Income portfolio versus the Australian market.

Weighted Average MSCI Low Carbon Transition Score11

You can see in the graph that the Ethical Income strategy is better than the market in terms of owning companies that are transitioning towards a low carbon environment.

Upside for natural gas from lengthy transition

Woodside Petroleum does score low on MSCI’s low carbon transition scale (2.0)12 as a company with ‘Product transition risk’. One example of such a risk is the revenue compression for gas companies from zero-emissions cars. However, they also have upside from an interim decarbonization solution.

As Australia’s largest natural gas producer, Woodside is in a strong position to excel here. Through our engagement with the company, we are comfortable that Woodside Petroleum is one of the highest quality operators in the oil and gas industry and that mitigating these risks is top of mind for their management.

Natural gas will continue to be a significant part of Australia’s transition to renewable green energy, which has many decades to go. We are happy to continue to advocate for this part of the solution. The investment challenge will be to ensure the transition continues and remains sustainable in the future.



Past performance is not a guide to future returns.
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 Environmental, Social and Governance (ESG) factors form an important part of the analysis and decision-making process at Martin Currie and informs, but does not necessarily drive, investment decisions. As such, strategies may not necessarily meet an individual’s expectations of sustainability.
2 Source: Contact Energy (2020), Sustainability
3 Source: Martin Currie Australia, MSCI; as of 31 December 2019.
4 Source: Martin Currie Australia, MSCI; as of 31 December 2019. Data calculated for the representative Martin Currie Australia Ethical Income account. This strategy is not constrained by a benchmark, however for comparison purposes the strategy is shown against the S&P/ASX 200 Index. Carbon emissions data available for 100% of the portfolio and 96.3% of the S&P/ASX 200 Index.
5 Source: Martin Currie Australia, FactSet; as of 31 December 2019. Data calculated for the representative Martin Currie Australia Ethical Income account.
6 Source: US Energy Information Administration; based on pounds of CO2 emitted per million British thermal units (Btu) of energy.
7 Source: IEA (2019), The Role of Gas in Today's Energy Transitions; Mt CO2 = million tonnes carbon dioxide. Coal-to-gas switching includes emissions reductions in sectors where the market share of coal decreased, and the market share of gas increased within each region. The baseline increase in emissions assumes no improvement in the carbon intensity of energy or the energy intensity of gross domestic product (GDP) since 2010. Savings are calculated as those which occur compared to 2010.
8 26+2 refers to the provincial level cities of Beijing and Tianjin and 26 cities in Beijing's surrounding provinces of Hebei, Shanxi, Shandong and Henan
9 Source: IEA (2019), The Role of Gas in Today's Energy Transitions
10 Source: MSCI (2019), Climate change and climate risk
11 Source: Martin Currie Australia, MSCI; as of 31 December 2019. Data calculated for the representative Martin Currie Australia Ethical Income account. This strategy is not constrained by a benchmark, however for comparison purposes the strategy is shown against the S&P/ASX 200 Index. Low Carbon Transition Scores available for 100% of the portfolio and 96.3% of the S&P/ASX 200 Index.
12 Source: Martin Currie Australia, MSCI; as of 31 December 2019.



Important information

Past performance is not a guide to future returns.

The information contained in this presentation has been compiled with considerable care to ensure its accuracy. But no representation or warranty, express or implied, is made to its accuracy or completeness.

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.

Martin Currie has procured any research or analysis contained in this presentation for its own use. It is provided to you only incidentally, and any opinions expressed are subject to change without notice.

The opinions contained in this document are those of the named manager(s). They may not necessarily represent the views of other Martin Currie managers, strategies or funds.

Please note the information within this report has been produced internally using unaudited data and has not been independently verified. Whilst every effort has been made to ensure its accuracy, no guarantee can be given.

Some of the information provided in this document has been compiled using data from a representative account. This account has been chosen on the basis it is an existing account managed by Martin Currie, within the strategy referred to in this document. Representative accounts for each strategy have been chosen on the basis that they are the longest running account for the strategy. This data has been provided as an illustration only, the figures should not be relied upon as an indication of future performance. The data provided for this account may be different to other accounts following the same strategy. The information should not be considered as comprehensive and additional information and disclosure should be sought.

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.