ESG Focus: The Little Big Things – 27-09-2023

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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 – 27-09-2023

In this edition, we check out an ASX-listed ESG targets summary from Macquarie and board expectations for rising decarbonisation capex before going global and checking out the top 10 sustainability topics, AI opportunities, a new platform for net zero steel, global food storage issues and looming problems for the global shipping industry – read supply chains.

-Jarden’s director survey confirms decarbonisation capex to rise
-Morgan Stanley lists its top 10 sustainability topics
-Goldman Sachs highlights sectors to benefit from AI
-Macquarie checks out ASX200 target scene
-A platform launched to link net zero steel buyers and producers
-Food storage costs on the rise and 57% of producers running near breakeven
-Emissions charges to cost shippers hundreds of millions, but ship-building binge the big problem

Compiled by Sarah Mills

Director Survey: Decarbonisation Capex To Rise

Jarden’s ESG Non-Executive Director Survey (NED) 2023 reveals a growing breach between investors and NEDs based on the findings of Jarden’s ESG Investor Survey 2023, published in July.  

While investors and NEDs agree climate change remains the No 1 ESG focus area and increasingly perceive a reward for better ESG performance, they are less aligned on ESG’s role in corporate strategy, prioritisation and ESG linkage in remuneration. 

The survey shows NEDS have become more focused on ESG risks than returns, relative to investors, observes Jarden, with risk mitigation and managing regulatory risk; and alignment of stakeholder interests cited as the two main drivers of corporate ESG strategy. 

“ROIC accretive” was ranked as one of the least important drivers, as opposed to be among the top two considerations of investors.

Jarden expects greater alignment will drive valuation opportunities.

Meanwhile, capital expenditure on decarbonisation strategies is expected to rise despite economic uncertainty.

The survey also observed a decline in emphasis on social licence.

The big-ticket item for NEDs after climate change was data security and privacy.

Boards also believe there is a gap between the quality of ESG strategy and execution.

Morgan Stanley’s Top 10

Morgan Stanley lists its top 10 sustainability topics debates that it expects will determine investor sentiment, asset allocation and alpha (potential outperformance):

-Energy transition
-Quantifiable social criteria that can drive alpha
-Discovering under-appreciated ESG Rate-Of-Change investment opportunities with a greater focus on “first and second derivative” ideas
-Leveraging data analytics to support top-down and bottom-up analysis
-Physical climate change risks (storms, food, etc)
-AI – although the broker is surprised at the degree of negative focus being placed on AI and its risks and unintended consequences, over its ESG opportunities
-Controversy risk (reputation risk associated with ESG failure), which also relates to supply chain risk
-Regulation
-Carbon markets
-Fixed income: greeniums and sustainability-linked bonds and increased financing related to climate mitigation and adaptation

Biodiversity is one area that the broker says is witnessing a decline in investor interest due to lack of available and quality data.

Goldman Sachs Checks Out AI Opportunities

Goldman Sachs agrees with Morgan Stanley that investors are focused on AI risks rather than the technology’s potential to support environmental and social challenges. 

The analyst expects risk mitigation will remain paramount but expects sustainable investors will increasingly appreciate AI’s potential to accelerate progress.

In a long report, Goldman Sachs targets five key areas that are likely to benefit from AI:

-Climate
-Human capital
-Healthcare
-Agriculture
-Education

The analyst also identifies stocks that are likely to benefit from the rollout of AI, none of which are ASX listed.

Near-Zero Steel By 2030

The World Economic Forum is launching a transparent marketplace platform for hard-to-abate emissions sectors such as steel, aviation, shipping, trucking and steel, called The Greenhouse Challenge Platform.

The initiative aims to integrate the demand and supply sides of the steel industry by connecting companies interested in purchasing near-zero steel with those that can produce it.

Initial members – The First Movers Coalition – have pledged to buy near-zero steel for at least 10% of their purchases by 2030.

“Rather than have individual companies operating in a vacuum, we would like to connect companies, investors, and enabling technologies to allow collaboration to fast-track the development and deployment of climate tech solutions,” says the platform’s chief collaboration officer Mark Rowland

The launch is part of the forum’s Near-Zero Steel 2030 Challenge.

Macquarie Summarises ASX200 Progress On Targets

After reviewing the ASX200 FY23 results for emissions reductions targets and 100% renewables targets, Macquarie observes the following in a very neat round-up, which nicely complements FNArena’s recent coverage that proved very popular:

-34 companies have set a 2025 or sooner target (17% of the ASX200)

-The majority of companies are on track to meet near-term targets, save for seven of the 34, which are 30% or less progressed

-15% of the ASX200 has set a near-term 100% renewable energy target, and only four of these are less than 30% progressed

Near-term emissions targets: The 10 companies that have already met or exceeded emissions targets include: Abacus Group ((ABG)), AGL Energy ((AGL)), Commonwealth Bank ((CBA)), Cochlear ((COH)) Insurance Australia Group ((IAG)), Metcash ((MTS)), National Australia Bank ((NAB)), QBE Insurance ((QBE)) and Woodside Energy ((WDS)).

Abacus, Commonwealth Bank, Cochlear and Abacus all sharply exceeded their targets.

Companies still to have also set near-term targets include: Ampol ((ALD)); Atlas Arteria ((ALX)); Amcor ((AMC)) ANZ Bank ((ANZ)), ASX ((ASX)); Bendigo & Adelaide Bank ((BEN)), Boral ((BLD)); Breville Group ((BRG)); Charter Hall Group ((CHC)), Charter Hall Long WALE REIT ((CLW)); Charter Hall Social Infrastructure REIT ((CQE)); Charter Hall Retail REIT ((CQR)); Cromwell Property Group ((CMW)); IGO Ltd ((IGO)); Incitec Pivot ((IPL)); Link Administration Holdings ((LNK)); Medibank Private ((MPL)); QBE Insurance ((QBE)) Rio Tinto ((RIO)), which was forced to buy carbon credits; Scentre Group ((SCG)); Seek ((SEK)), Sims ((SGM)); The Star Entertainment Group ((SGR)); Virgin Money UK ((VUK)), Westpac Bank ((WBC)), Wesfarmers ((WES)); and Worley ((WOR)).

Near-term renewables targets: Six companies out of the 30 to set a 100% renewable energy target have already hit their goal. These include: APA Group ((APA)); ASX; Brambles ((BXB)); Charter Hall Social Infrastructure REIT; Elders ((ELD); and QBE Insurance.

Those companies to have also set 100% near-term renewables targets include: Auckland International Airport ((AIA)); ANZ Bank, Bendigo & Adelaide Bank,; Bank of Queensland ((BOQ)); Boral; Charter Hall Long WALE REIT; Charter Hall Group; Charter Hall Retail REIT; Elders ((ELD)); Goodman Group; Medibank Private; Metcash; National Australia Bank; Pinnacle Investment Management ((PNI)); Scentre Group, Seek, Sims, Suncorp Group ((SUN)), Telstra ((TLS)), TPG Telecom ((TPC)); Westpac, and Woolworths.

Macquarie observes most of those to set targets have relatively low emissions profiles, save for Woodside.

About 48% of ASX200 companies have set targets for 2026 to 2030.

Food Storage Costs Soaring

Post-covid inflation is pressuring cold food storage businesses, which is a bit of a problem given cold food chains will be central to feeding the forecast extra 2bn people by 2050, says Bloomberg Supply Lines.

Inflation in fertiliser, construction, shipping, fuel, electricity, pallets, seeds, packaging, rents and storage have hit global production and operating costs for growing fertilisers and the Ukraine War is not helping.

The journal says the Global Coalition of Fresh Produce estimates about 57% of the global fruit and vegetable industry is selling at a loss or break-even. It didn’t drill down to Australian producers.

Promoters of vegetable-based meats believe this may be the chance they are looking for. Given most of the rest of us aren’t keen on these products, at least not as yet, it’s going to be interesting to see how it plays out.

ETS To Add To Shippers Woes

Grocery costs are already under the pump but a forecast emissions driven rise in shipping bills could potentially exacerbate the cost of everything from food, to fuel and consumer goods.

However, industry observers appear to be more concerned about a looming shipping supply issue – a supply-chain risk – and it is less clear as to whether this will result in rising or falling costs, in an environment where shipping returns are falling due to the dampening effect of higher interest rates on consumer demand.

First to the emissions: The maritime industry has confirmed it will join the bloc’s Emissions Trading System (ETS) in January, meaning large cargo vessels will start paying for carbon emissions, advises Bloomberg Supply Lines.

The journal says the cost for major freight firms could run into the hundreds of millions of dollars and, depending on the fuel price, many are likely to pay for emissions rather than convert to marine biofuels. No wonder Morgan Stanley spies a recovery in carbon offsets in the wings.

Based on a carbon price of EUR90 a ton, ship classification society DNV tells Bloomberg emission costs for a single ship with 5000 standardised containers travelling between Asia and the EU over a year could be EUR810,000 in 2024, rising to EUR1.4m in 2025 and EUR2m in 2026.

But the ETS is just a minor player in the shipping industries woes. Supply and demand in the vessel market is looming as a massive cost, advises DNV.

Ageing fleets and soaring demand for new stock suggests big capital expenditure bills are on the horizon. It is likely to raise ship-building prices in an industry unlikely to have scaled up to meet the demand – which is substantial.

Bloomberg says record ship orders are looming over the industry as companies invest their pandemic windfalls into new vessels.

Drewry Maritime Research estimates the order book for new container ships at 890, or 28% of current global capacity worldwide. Blue Alpha Capital puts the cost at -US$89.5bn.

Bloomberg considers this to be a potential recipe for disaster given the industry’s boom-bust nature, observing freight rates are already flirting with below-breakeven levels and fears of overcapacity. 

Industry sources also point to an emerging supply-side risk in the second half in that supply is likely to outpace demand this year and next.

Those sources also say that while the industry has profited from the pandemic, the accumulated earnings are insufficient to fund the new technology and ships marked down for this decade.

Sun Cable Back On

Just a quick update for those that didn't get the news in FNArena's grid battery examination: Grok, Quinbrook and the Northern Territory Government are working together to deliver Sun Cable – a submarine electricity transmission cable to South-East Asia. They say more information will be published in coming weeks.

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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