ESG Focus: The Little Big Things – 26-07-2023

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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/

ESG Focus: The Little Big Things

In FNArena’s inaugural ESG bulletin we discuss capital destinations, green energy deflation, the impact of a fuel emissions standard, and AI regulation.

-Where is all the green money headed?
-Goldman Sachs’ green capital expenditure mosaic
-Morgan Stanley spies green deflation
-Fuel Emission Standard to drive opportunity
-AI Risks and ESG

Compiled by Sarah Mills

ESG is gaining pace and there’s so much going on, it’s enough to make the average investor’s mind boggle. 

To date, FNArena has taken a big picture view, covering global megatrends with domestic impact.

But so much other valuable research is crossing our desk that’s missing the cut.

The quandary is how to share this information while avoiding the typical tsunami of individual stories that can make it difficult to keep track of the fast-paced environment.

We settled on a bulletin called the Little Big Things, in which we summarise some of the more interesting tidbits that cross our desks. Enjoy.

Where Is All The Money Headed?

It’s always nice to know where to put your money so Morgan Stanley breaks down growth within the energy sector this decade.

Morgan Stanley expects solar and wind will continue to grow at the fastest past of all energy resources due to rapid adoption, hitting 45% of global energy generation by 2030, from 30% in 2022.

It expects nuclear will be roughly steady at 9.6% (9.3% in 2022); fossil fuels will fall to 44.9% from 60.7%; 

Amongst renewables, the broker predicts wind energy will rise to 15.1% of the mix from 7.4% in 2022; that solar will rise to 14.4% from 4.4% in 2022; and that hydro's share will ease to 14.6% from 15.2%.

Goldman Sachs Green Capex Mosaic

The green capital expenditure investment theme is one of Goldman Sachs' faves, and we'll be discussing it in greater depth in future editions of The Little Big Things. 

For now, we check out Goldman Sachs' Green Capital Expenditure Mosaic. 

The broker expects US$3trn will be required to reach Net Zero and off this, it expects Renewables will require US$1.15trn; Energy Efficiency US$610bn; Electricity Grids US$523bn; Electrification to grab US$302bn; Low Emissions fuels $132bn; Nuclear Generation US$90bn; Carbon Capture Utilisation and Storage US$90bn; Battery Storage US$52bn; Hydrogen End Use $49bn; EV Chargers US$38bn; and Hydrogen Infrastructure US$7bn.

What is interesting about this is that less environmentally friendly options such as nuclear generation, and largely unproven technologies such as carbon capture utilisation and storage, are forecast to garner more capital expenditure than proven, more environmentally friendly technologies such as hydrogen, making something of a mockery of the ESG concept.

Although the capital expenditure on nuclear energy (and to an extent carbon capture) reflects, as much as anything, the sheer cost relative to other forms of energy per watt, rather than the percentage of the energy mix.

Many observers believe investments in carbon capture to be much higher risk; and nuclear to be uncompetitive economically and also high risk given likely energy storage innovation.

Morgan Stanley, as noted above, expects nuclear energy to remain steady as a percentage of the energy mix, which will still require some additional investment given total energy demand is expected to grow.

Morgan Stanley Spies Green Deflation

Most pundits have forecast that the green transition will be slightly inflationary over the decade, and that deflation will kick in thereafter.

Morgan Stanley is one of these, and is perhaps even more optimistic, noting renewable costs have fallen below the cost of conventional generation and adoption is rising rapidly across Asia.

The broker posits we are entering an era of green energy deflation, which should solidly hit broader inflation by 2030 as the cost of the transition hits a tipping point.

On current projections, government support to clean power supply chains will generate -US$0.5trn in cumulative savings by 2030 (more than the entire annual investment in renewable power in 2022).

Green generation costs are forecast to fall quickly over the 2030-2040 decade (and before noting US renewables are already cost competitive), driven by technology improvements, lower costs, policy support and oversupply.

Morgan Stanley says cost deflation will not be distributed evenly across the world, the US nabbing the lion’s share (-US$243bn in total cost savings), followed closely by Asia (-US$227bn), then Europe (-US$66bn).

Its top global picks in the clean power deflation stories include Orsted, RWE, Reliance Industries, AES, Bloomenergy, Next Era Energy, Enel and Sembcorp, further illustrating Australia’s relegation to a global quarry for the green transition.

Outside of mining strategic metals and minerals, services contractor Worley ((WOR)) and strategic asset investor Macquarie Group ((MQG)) are often touted as future beneficiaries of the green energy transition locally.

The broker also observes green power has sharply outperformed broader markets every year for the past five years.

One of the main wildcards for inflation will be the localisation of supply chains, posits the broker. It is this, possibly more than green inflation, which could maintain pressure on inflation this decade. 

Fuel Emission Standard To Drive Opportunity

Jarden believes the lack of an Australian fuel emission standard (FES) is hindering the uptake of electronic vehicles (EVs) in the country.

The broker observes 85% of the global market is operating under an FES and the Australian government is only expected to publish details of industry consultations this half. 

Jarden expects charging infrastructure, EV retail and leasing space should all benefit from the introduction of an FES.

In terms of ASX-listed companies, Jarden suggests main beneficiaries would include Rectifier Technologies ((RFT)), Eagers Automotive ((APE)) and Fleet Partners Group ((FPR)).

Also, there is potentially a negative outcome for Viva Energy ((VEA)) and Ampol ((ALD)) given their reliance on refinery and fuel margins.

AI Risks and ESG 

Morgan Stanley responded to the White House’s press release this week following commitments from seven major AI companies to manage AI risk.

Amazon, Anthropic, Google, Inflection, Meta, Microsoft and Open AI all committed to ensure products are safe before bringing them to market; to build systems that prioritise security; and to build the public’s trust.

The US Administration is developing an executive order (while pursuing unlikely bipartisan legislation to support responsible innovation), which the broker expects will be pragmatic given the Administration’s close liaison with major tech companies.

Morgan Stanley believes these commitments should be viewed positively given they reduce risk without sacrificing opportunity; and doubts it will affect the near-term prospects of Amazon, Google, Meta or Microsoft.

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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