The transition from coal to renewable energy

In the Australian market, we see the transition from coal to renewable energy as well under way, and we are happy to help our clients be a part of this evolution towards a cleaner, lower carbon future.

MCATransitionAbstract

We continue to encourage and support companies who are transitioning to sustainable and renewable energy

How we screen for carbon

ESG impact screens employed by the Ethical Income strategy exclude companies that are involved in:

  • the mining or transport of thermal coal; and
  • any power generation company that uses thermal coal for power generation.

Based on client feedback and market sentiment regarding climate change, our ESG impact screens were updated on 1 April 2019 from a partial exclusion (20% of EBITDA) to a full exclusion of thermal coal.

What we screen out1

The change to remove thermal coal exposures in April 2019 has led to new exclusions such as Aurizon (for coal transport), and Genesis Energy (a NZ electricity generator which uses some thermal coal). These securities were previously held in the portfolio.

Companies such as AGL Energy, which uses coal for electricity generation, and companies which mine and extract thermal coal such as Whitehaven Coal were already excluded under the previous guidelines.

MCAEthicalValueScreens

Source: Martin Currie Australia; as of 31 May 2019.

We encourage the change towards renewables

Through our investments, we continue to encourage and support companies who are transitioning to sustainable and renewable energy.

Our portfolio is aligned to this process through our investments in renewable focussed New Zealand integrated electricity utilities Contact Energy and Meridian Energy, who predominately use hydro or geothermal power.

These companies are ranked as high Quality by our analysts based on their strong Environmental credentials, and above average business strength & market shares. This makes them appealing for the strategy from both an ESG and sustainable low-risk income perspective.

ESG factors are integrated into the investment process

As we believe that ESG factors such as climate change risk and carbon footprint can increase or reduce the risk of companies not delivering the cashflows that our analysts have forecast, our investment process incorporates ESG factors directly into the Quality rating applied by our analysts, and where relevant, is factored directly into their cashflow forecasts.

The combination of earnings and Quality adjustments can tilt our assessment of fair value on these stocks, and as such adjustments due to climate change risk may impact our decision to invest in these stocks.

Managing the transition to a lower carbon economy

MSCI have also recently started looking at 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.

The MCA Ethical Income strategy’s MSCI ESG Research Low Carbon Transition Score is better than that of the S&P/ASX 200 Index, and this is particularly due to its off-benchmark holdings in the highly scoring NZ utilities2.

MSCI low carbon transition score

MSCILowCarbon

Source: Martin Currie Australia, MSCI as of 31 March 2019.

Gas producers are part of the transition

While our holding in gas producer Woodside Petroleum does have a MSCI ESG Research Low Carbon Transition Score of just 2.0, we see the company’s use of gas for energy instead of coal as an important part of the Australian and Asian market’s move towards a lower carbon, cleaner future.

We understand that the energy mix cannot consist of renewables alone, and given gas is a lower emitting fuel than coal for base load electricity generation, it will help to reduce the overall carbon intensity of electricity generation over time.

Regular direct engagement with company management and boards helps us to understand to what extent they have identified material ESG risks and how they are managing these, so that they do not impact future earnings, and their plans for future improvements in this space.

A key question when the investment team is engaging with any company board is whether the company concerned has a climate change policy and how they evaluate the risk of climate change.

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.

Substantially lower carbon footprint and strong environmental credentials

The Ethical Income strategy’s transition towards renewables is also apparent in the carbon footprint of the Ethical Income strategy.

When compared to the broader S&P/ASX 200 market, both MSCI Carbon Emissions and Carbon Intensity3. The strategy also scores well on the MSCI ESG Environmental Score, which forms part of the total Fund ESG rating measures versus its Australian Equity peers4.

MSCI Carbon emissions and carbon intensity

EthicalCarbonChart

Source: Martin Currie Australia, MSCI; as of 31 March 2019.

EthicalIncomeESGPerformance

Source: Martin Currie Australia, MSCI; as of 30 April 2019.

Summary

At Martin Currie Australia, we do not manage our portfolios to attain a particular ESG score, this is not a driver of specific investment decisions.

The strong results of our Ethical Income strategy exhibited in the MSCI ESG Research Scores discussed above – Low Carbon Transition Score, Carbon Emissions & Carbon Intensity and Environmental Score – is an outcome of our steadfast focus on the Quality of our holdings, of which climate change and carbon footprint is an important determinant



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

1Source: Martin Currie Australia; as of 31 May 2019. Screens shown for the representative Martin Currie Australia Ethical Income account. *Added to screen on 1 April 2019 assumed that any of the security transactions discussed here were, or will prove to be, profitable.

2Source: Martin Currie Australia, MSCI as of 31 March 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.

3Source: Martin Currie Australia, MSCI; as of 31 March 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.

4Source: Martin Currie Australia, MSCI; as of 30 April 2019. Data calculated for the representative Martin Currie Australia Ethical Income account.



The MSCI information may only be used for your internal use, may not be reproduced or disseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an ‘as is’ basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any off the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages (www.msci.com).

MSCI ESG Research LLC’s (“MSCI ESG”) Fund Metrics products (the “Information”) provide environmental, social and governance data with respect to underlying securities within more than 23,000 multi-asset class Mutual Funds and ETFs globally. MSCI ESG is a Registered Investment Adviser under the Investment Advisers Act of 1940. MSCI ESG materials have not been submitted to, nor received approval from, the US SEC or any other regulatory body. None of the Information constitutes an offer to buy or sell, or a promotion or recommendation of, any security, financial instrument or product or trading strategy, nor should it be taken as an indication or guarantee of any future performance, analysis, forecast or prediction. None of the Information can be used to determine which securities to buy or sell or when to buy or sell them. The Information is provided “as is” and the user of the Information assumes the entire risk of any use it may make or permit to be made of the 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 ahead of any planned investment. The distribution of specific products is restricted in certain jurisdictions, investors should be aware of these restrictions before requesting further specific information.