ESG Focus: ASX200 Off And Running, Part 3

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FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future: 
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ESG Focus: ASX200 Off And Running Part 3

February reporting season proved a watershed for ESG as steel and aluminium producers announced plans to decarbonise, mining services companies realigned their priorities to ESG revenue streams to support their major clients, and scrap metals companies kicked into gear.

-Green revenues favoured over straight decarbonisation
-Mining services companies sharpen ESG focus
-Scrap metals companies kick into gear

By Sarah Mills

One of the major ESG themes to emerge from the February reporting system was a broad shift among ASX200 companies to develop or buy green revenue streams.

Analysts believe critical mass is growing and markets should start to witness serious innovations within the next few years now companies are starting to get their strategies in place.

In Part 2 of this article, we noted South32 ((S32)) planns to decarbonise its Brazilian smelter, generating green aluminium revenue by 2023; that Fortescue Metals' ((FMG)) Fortescue Future Industries purchased the largest renewables energy generation company in the southern hemisphere, and that Alumina ((AWC)) was building its green aluminium revenue and Rio Tinto ((RIO)) pledged to decarbonise Tomago's aluminium production (albeit not until 2029).

This article looks at the Bluescope Steel's ((BSL)) ambitions (it is yet to generate any green revenue of note) as it did make some interesting announcements during the period; and then switches focus to the mining services industry and metal recyclers.

We address divestments, M&A and circularity in Part 4 of this series.

Bluescope Steel Airs A Plan

Bluescope Steel last year announced a 2050 net zero target with interim goals at 2030, and said it was starting to embed decarbonisation into its strategy, in which green steel production through hydrogen and renewable energy will play a part.

The announcement would have been considered the bare minimum from the ESG investment community at this stage of the game. 

The company has allocated $150m over five years to the task and the expects a total of $300m to $400m will be required over ten years.

In October, the company announced a partnership with Rio Tinto to develop hydrogen-based green steel through a direct reduction iron melter. A breakthrough on this front could possibly bring the company into the ranks of green-revenue producers, but the timeframe at this stage is unclear.

During the half, the company also signed memorandums of undertanding with Shell Energy Operations to explore and develop renewable hydrogen projects, which include projects at BlueScope's Port Kembla Steelworks, including a pilot renewable hydrogen electrolyser plant and an Illawarra hydrogen hub concept.

In our previous article we noted a breakthrough in the commercialisation of hydrogen technology, which could comfortably bring the price of hydrogen down to $2/kg, illustrating solid development on the hydrogen commercialisation front.

While green steel is the main game for the company, it has been working on treatments to it Colorbond roofing products that may enhance solar rooftop generation.

The company has also said it will be turning to the carbon offsets market – not ideal.

Investors will be keeping a keen eye to the pace of progress on the green steel front but at this stage, the company's progress is uninspiring.

Mining Services Companies sharpening ESG Focus

There were a slew of announcements from the mining services sector in the February reporting season.

Worley ((WOR)) committed to spend $10bn over three years to improve its sustainability and plans to increase the percentage of sustainable business to 75% within five years from 32% now: clear, verifiable targets that are likely to be appreciated by the ESG community.

While most brokers ave a Buy rating on the stock, a few shifted to Holds and Sells after recent share price strength.

From an ESG perspective, the announcement suggests Worley’s share price has a floor, and that investors are likely to buy the dips.

But the company will have to publicly demonstrates progress on these metrics to continue to garner support and a keen eye will be on the Aust reporting season for evidence of such, demonstrating how just the publication of such metrics is likely to sharpen management’s focus on decarbonising the business.

Analysts said that in the mining-services sector NRW Holdings ((NWH)) proved an ESG standout. The company’s FY21 result outpaced market expectations and was accompanied by upgraded guidance.

The company announced plans to grow green technology revenue from 6% of Mining and 38% of Minerals Energy and Technologies in FY22 to 18% and 48% respectively. The company won Rio Tinto’s tender to start construction on its solar and photovoltaic battery energy storage system in the Pilbarra.

The company is developing an environmental road map and plans to bring in fuel-efficient vehicles. 

NRW also purchased Primero, a vertically integrated engineering group (vertical integration is a key ESG theme) that specialises in the design, construction and operation of global resource projects, which include ESG thematics such as water, hydrogen and battery recycling and metals recovery.

The latter points to the company offering both a decarbonisation and circularity play.

NRW Holdings still holds “brown projects” such as the Coronado Global Resources ((CRN)) coal contract, so again, the market will be keeping an eye peeled for the August results for solid progress on green projects.

All the brokers in the FNArena database currently have a Buy or equivalent rating on the company.

Lycopodium ((LYL)) and Perenti Global ((PRN)) are relative laggards – at least on the ambition front.

Lycopodium announced a new strategic initiative to develop a more formalised footprint in the renewable energy sector – a tad vague.

The company offers a “compliant” path to net zero emissions, but it is a long way off from providing meaningful strategically drivers for new green revenue streams.

The company did report its intention to focus on future-facing commodities (it would be odd if it didn’t) and also on the battery industries value chain as downstream investment accelerates.

Perenti led its interim report with a sustainability pitch before detailing the results, suggesting a strong sensitivity to the subject.

The company appears to be taking the tech route.

Perenti has signed a Memorandum of Understanding with Sumitomo for the co-creation and joint development of digital mining products for the advancement of sustainable mining practices – primarily mining process optimisation and carbon footprint management. 

Perenti is also targeting the tech route for safety solutions, which one would imagine it would be a strong ESG focus area given the company’s African exposure.

New green revenue streams and ESG outcomes, however, appear to be longer dated and strategic integration is vague.

Metal recycling

Meanwhile, Sims ((SGM)), Australia’s largest metal recycler, enjoyed a solid half, as global demand for scrap metal rose in tandem with soaring iron-ore, copper and aluminium prices. 

The company outpaced consensus as China accelerated its decarbonisation.

The half proved something of a free ride for Sims, the company needing to demonstrate little real dollar commitment to sustainability as it finally managed to cash in on the renewables push.

The company made all the right noises in its report and announced it would transition its Claremont New Jersey operation to renewable electricity this half.

Sims signalled its plan to grow through acquisitions, buying Atlantic Recycling Group in the US and Australia’s Recyclers’ Group.

The company stands to benefit from decarbonisation and circularity, and yet its fervour has appeared a little lacklustre from a strategic viewpoint. 

Meanwhile, the Ukraine War may have triggered a rethink, with the company’s operations in Turkey requiring natural gas from Russia, highlighting a potential need to examine its energy operations. The company’s Ukraine scrap operations are also in the mix.

Otherwise, Sims gave no tangible indication in its interim result of plans to incorporate ESG themes such as circularity, vertical integration or environmental partnering within its strategy, and appears to be positioning itself as a conservative, pure-play recycler.

Given the intensity of global ESG dynamics, this suggests Sims could just as easily switch from predator to prey, unless it builds more green moats or outgrows, either organically or through rapid M&A, its predators' appetites.

The author owns shares in nearly all the abovementioned companies.

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future: 
https://www.fnarena.com/index.php/financial-news/daily-financial-news/category/esg-focus/

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