ESG Focus: The Little Big Things – 19-12-2024

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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: 
https://www.fnarena.com/index.php/financial-news/daily-financial-news/category/esg-focus/

Little Big Things takes a deep dive into decarbonisation of the global energy grid, solar powers up and sustainable investing themes for the year ahead.

-Grid resilience imperative for net zero
-Outlook for sustainable investment
-Outsized growth in solar energy generation
-ESG insights from Australia’s AGM season

By Danielle Ecuyer

The energy transition post COP29

Emanating from COP 29, Morgan Stanley highlights a pledge from countries for up to 1500GW of energy storage by 2030, which is a sixfold increase on 2022 global capacity.

There was also a commitment to add or recondition 25m kilometres of grids by 2030; both are supportive to assist in the roll-out of renewable developments, underpinned by the COP 28 pledge to triple renewables capacity by 2030.

The broker stresses smart grids assist with both climate mitigation and adaptation to manage interruptions, avoid outages, incorporate distributed energy resources, and improve energy efficiency while reducing losses.
In the Asia Pacific region, the broker estimates over US$400bn in smart grid investments between 2030-2040.

“It is critical to enhance ‘the stability, integration and resilience of energy grids’ and ‘ensuring energy security.” [COP29 Pledge]

Investing in advanced technologies like High-Voltage Direct Current (HVDC) transmission is also emphasised to reduce power losses and support integration of renewables and clean tech.

Investment in smart grids is essential for the energy transition, with multiple experts highlighting the “bottlenecks” for energy transition, including facilitating more clean energy capacity to meet growing demand from data centres.

In the US, Morgan Stanley highlights investment in renewables has doubled since 2010, while investment in the US grid has stagnated at US$300bn p.a. since 2015. The International Energy Agency estimates grid investment needs to increase twofold by 2030 to reach net-zero emissions by 2050, globally, including universal access to energy.

The broker also anticipates over US$400bn of investment in smart grids between 2023 and 2030.

Key sustainability themes for 2025

Goldman Sachs outlines the “sustainable” investment themes that provide the most upbeat outlook for 2025 based on improved cost-effectiveness from innovation to increase competitiveness or changes to corporate, consumer, policymaker, and regulator priorities.

The broker highlights the following themes:

-Reliability of energy, power, and water supply

-Innovation in efficiency for energy, land, and resource use

-AI/data centre power demand growth and the disposition of “Big Tech/hyperscalers” to pay a “Green Reliability Premium,” which would support nuclear and other clean energy power sources

-A growing requirement for AI and automation as sustainable investors look to close the gap over increasing labour market challenges with ageing populations in developed countries

The broker remains positive on stocks with exposure to green capex, adaptation, the circular economy, nature/biodiversity, access/affordability, and quality operators with a “less is more” slant to sustainability being integrated as corporate performance is “weighted” over corporate signaling.

UBS swings into the energy transition

“There can be no sustainable development without sustainable energy development“, declared Margot Wallstrom, Former Vice-President of the European Commission.

With a focus on Europe, the Middle East, and Africa, UBS took a deep dive into the energy transition, stressing that despite all the investment in renewables to date, coal, oil, and natural gas still represent 80% of the total global energy mix across industry, transport, and buildings.

By 2050, the International Energy Agency (IEA) suggests renewables will be more than 90% of the energy mix and fossil fuels less than 10%.

Global energy investment is expected to surpass US$3trn for the first time in 2024, with clean energy technologies receiving US$2trn, more than twice the amount spent on fossil fuels with an acceleration post-2020.

Investment in energy will be required to advance to US$4trn to US$5trn over the next 10 years from US$2trn to US$3trn on average over the past five years. Total annual capital investment in energy to reach net-zero is required to rise to 4.5% of global GDP from 2.5% recently, moving back to 2.5% by 2050.

The IEA expects investment in fossil fuels to decline gradually, with a rise in low-emission fuel supply such as hydrogen and bioenergy.

Electrification of economies is considered a key theme, including the expansion and upgrades of electricity networks, with capex in grids expected to increase to around US$750bn-US$800bn by 2030 from around US$250bn currently.

The share of electricity in total energy consumption is forecast to more than double by the IEA to around 41% in 2050 from around 20% currently. Electricity demand is anticipated to grow at an average of 2.5%-3% p.a. out to 2050. The share of fossil fuels in energy consumption is forecast to fall to around 38% by 2050 from 66% currently.

Regarding nuclear power, UBS believes two factors could drive global capacity: firstly, a China-based model whereby government support increases investment in capacity, and secondly, technology companies commit funds to nuclear advancements.

The broker envisages some 58-86GW of nuclear capacity being added by 2030, compared to French nuclear capacity at circa 61GW, with more than half hailing from China. Including the possibility of more nuclear capacity as a percentage of the total global electricity mix, nuclear’s share could fall to around 8% from 9-10% currently.

For more on UBS’s latest forecasts on uranium: https://fnarena.com/index.php/2024/12/17/uranium-week-outlook-for-2025/

Touching on carbon capture and storage (CCS), UBS believes the high costs of the process, due to the complexity of design and customisation requirements, will limit the “widespread implementation” of CCS.

Solar shines brightly

Recent media reports have focused on the exponential growth in solar installations globally. The Rocky Mountain Institute explained solar power capacity has been doubling every three years, while the cost per watt has declined by -83% over twelve years to 88c per watt installed, down from $5.12.

Kingsmill Bond from the Institute states that at current installation rates, solar will provide 12% of global electricity in three years, 24% in six years, and 48% in less than a decade.

China leads the way, having installed more solar capacity than the rest of the world combined in 2023. One of the country’s solar parks, Golmud, in the desert of Qinghai Province, is among the largest, occupying a land area greater than Sydney’s Botany Bay.

The park generates 2.2GW of electricity, equivalent to two coal-fired power plants.

China also produces 80% of the global solar panel capacity and has played a key role in driving down prices.

Solar installation is not exclusive to China.

“The folks in Pakistan, Namibia, Bangladesh, Uruguay, Chile, or Vietnam they too want local, cheap energy, and they too can buy affordable products from China and harness the sun,” says Kingsmill Bond.

In terms of land usage, Transition Zero estimates global solar installations occupied 19,000 square kilometres as of September 2024, around one-third the size of Tasmania.

ESG Updates from corporate Australia 

Speaking of CCS, Santos ((STO)) outlined its long-term CCS targets at the 2024 investor day.

Macquarie highlights a 14mtpa target of third-party CCS storage by 2040, which would aim to reduce emissions by over -50% from 2023 levels. Estimated capacities are circa 20mtpa at Moomba, 10mtpa at Bayu-Undan, and 5mtpa at Reindeer.

With current Moomba CCS phase one at 1.7mtpa, Bayu-Undan phase one at 2-3mtpa (with a final investment decision in 2025), and Reindeer phase one at 1mtpa (with a final investment decision in 2026), Macquarie stresses a “significant ramp-up of scale” is required.

Santos also outlined joint venture studies with Tokyo Gas, Osaka Gas, and Toho Gas for developing low-carbon fuels.

Jarden observes in 2024 the AGM season delivered the second-highest number of remuneration report strikes for S&P/ASX300 companies since the two-strike rule was introduced in 2011.

There were 32 strikes in 2024 versus 41 in 2023 and 22 in 2022, as noted by CGI Glass Lewis, which represents over a 50% rise on the average from 2011 to 2022.

Reasons attributing to the strikes include poor shareholder returns, performance issues, shareholder activism, and short-term remuneration signaling a lack of commitment to the company.

Shareholders are assessed as preferring to protest using remuneration reports rather than director reports, which suggests to Jarden that shareholders might prefer to have ongoing conversations and engagement with companies rather than voting against directors. A lack of board spill resolutions is also indicative of a more proactive and conciliatory approach.

Nine second strikes were experienced by Lovisa Holdings ((LOV)), Platinum Asset Management ((PTM)), Sandfire Resources ((SFR)), Clinuvel Pharmaceuticals ((CUV)), Dicker Data ((DDR)), Johns Lyng Group ((JLG)), Brainchip Holdings ((BRN)), and Dexus ((DXS)).

The highest vote was against Perpetual at 88.1%, the most significant since National Australia Bank in 2018 at 88%.

Nine companies narrowly avoided a second strike, including ALS Ltd ((ALQ)), and some are experiencing heightened scrutiny, including Goodman Group ((GMG)), which is up to its fifth strike in 10 years, and Lovisa, with its fourth strike in succession.

Over 16.6% of Woodside Energy Group’s ((WDS)) shareholders voted against the re-election of Chair Richard Goyder due to “unresponsiveness” on shareholder concerns regarding climate risk management over the last four years while adopting growth pathways that do not align with shareholders’ interests.

Some 15.9% of shareholders voted against Treasury Wine Estates ((TWE)) Director John Mullens, who is both the Chair of Qantas Airways ((QAN)), Treasury, and Brambles ((BXB)), on the issue of over-boarding.

Two “Say on Climate” votes were recorded, Woodside with 54.8% votes against and BHP Group ((BHP)) with 7.8% against. Say on Climate votes are expected to include Santos ((STO)), AGL Energy ((AGL)), and South32 ((S32)) in 2025, Jarden states.

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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