ESG Focus: The Little Big Things – 15-11-2023

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ESG Focus: The  Little Big Things – 15-11-2023

We’re going macro this week as some analysts call out rate cuts as early as March, before going green: capital costs are falling for green manufacturers and decarbonisers; Morgan Stanley offers late-cycle US green share-market tips; the battle for Origin Energy continues; small modular nuclear reactors suffer blow after blow; a moratorium is issued on Scope 3 litigation; and Australia pivots to polysilicon manufacturing. 

-Analysts tipping early rate rise
-Cost of capital falling for green projects
-Small modular nuclear reactors stranded
-Battle of Origin Energy provides insights into green investments
-$8bn investment in Townsville polysilicon manufacturing
-Moratorium on Scope 3 legislation
-US House clears funding into early 2024

Compiled by Sarah Mills

Analysts Calling For Lower And deeper

If someone hasn’t invented a Musk index yet, it might well be time. 

Elon Musk may yet prove right in his assertion that interest rates will need to fall by early next year. 

UBS Investment Bank and Morgan Stanley are forecasting cuts to the US Federal Reserve cash rate as early as March – and much deeper than markets are anticipating.

UBS expects the Fed, possibly starting in March, will cut rate nearly four times more than that which the markets are pricing in.

Morgan Stanley is sticking with the widely pegged June date, but equally believes cuts will be much deeper than forecast.

These predictions are founded on the analyst’s observations that inflation is normalising faster than expected.

Last night, inflation rose less than forecasts in October, supporting analysts’ forecasts, and triggering a share price rally.

The US core consumer price index, which excludes food and energy costs, rose 0.2% in October. 

In China, stimulus is the plat du jour, the government injecting (the equivalent of) US$137bn into the economy to shore up the property sector.

Goldman Sachs (which has proved pretty accurate with its oil forecasts in the past) begs to differ, doubting a rate cut will materialise until the next December quarter. 

Guess we will see soon enough what kind of a bellwether Musk and Tesla sales will turn out to be.

Cost Of Capital Falling For Green Projects

Capital costs have been severely hampering some green projects but that is all about to change.

Supply chain inflation appears more orderly and a cut in interest rates some time next year would sharply reduce capital expenditure bills, boosting investment in a range of industries from EVs to grids, say analysts.

Many investors are positioning ahead of time and pundits expect an upswing in M&A activity as predators grab their final chances.

Morgan Stanley in a report titled Global Energy Transition: Cost Declines and Growing Support For Transition Technologies observes costs have already fallen sharply in 2023.

The analyst observes solar wafer prices have hit record lows; Tesla vehicle prices are near the average price for internal combustion engine (ICE) vehicles; and novel clean energy technologies such as cadmium telluride solar cells promise to sharply boost efficiency.

Decarbonisation Theme Underperforms In 2023

Morgan Stanley observes decarbonisation, previously one of the most investable ESG themes, has materially underperformed in the year to date, given high interest rates on top of other idiosyncratic challenges.

But the market is now switching into late-rate-cycle and is on a deflationary arc, says the analyst, advising the tide is about to turn and provides its top stock picks.

As a result, the analyst switches its focus to “stock selectivity” over thematic investing.

Morgan Stanley observes genuine challenges (as opposed to a temporary rate-induced capital crunch) in European stocks such as Orsted that were caught between rising costs and set purchase power agreements may have unfairly hit other US developer stocks.

Morgan Stanley says the economics of large-scale renewable projects in many parts of the US are compelling.

The analyst also observes deflation in clean energy equipment costs and higher tax credits are about to kick in and expects companies with scale, big economic moats and access to capital will emerge triumphant.

For international investors, Morgan Stanley recommends NextEra, AES Corp, Altus Power and Hannon Armstrong Sustainable Infrastructure Capital.

Battle Of Origin Continues

AustralianSuper has upped its opposition to the Brookfield consortium’s $20bn bid for Origin Energy ((ORG)), increasing its stake in the company to 16.5%.

The stoush is indicative of the growing opposition between shareholders and acquirers in the green market.

Higher interest rates and lower share prices have created takeover situations that many believe to be opportunistic given the megatrends in play, and the broader macro outlook.

Several promising small Australian (and international) green players have either been snapped up or sent to the wall in the last few years as deep pockets jockey for position.

The willingness of AustralianSuper to pay up to $8.93 for shares perhaps gives a better indication of Origin Energy’s long-term value than has been ascribed by the market in the past two years.

Small Modular Nuclear Reactors On The Nose

While decarbonisation plays are getting bigger, better, cheaper and closer, nuclear plays, outside of heavy government subsidies, appear to be getting smaller, worse, more expensive, and more distant, following the collapse of major SMR manufacturer Nuscale Power Corp (but not after receiving considerable government support).

Small Modular Reactors have been billed as the great white hope of the nuclear industry, and are supposed to reduce the exorbitant costs of nuclear energy by creating reactors on an assembly line.

Nuscale's was the first and only such reactor to be approved by the Nuclear Regulatory Commission.

The company had secured a deal to build a 462 megawatt facility in Idaho but was unable to attract buyers for its output as its estimated cost of power jumped 53% to US$89 per megawatt-hour, and was possibly shooting into three-figure territory, conjectures Bloomberg, as bond yields pressed higher.

So renewable energy is not the only victim of high interest rates and rising capital costs.

But unlike SMR energy, renewable energy prices have fallen sharply, making the economies of small reactors even worse than they were, and with grid batteries barrelling down, and investment rocketing, dwarfing current investment, the future of SMRs looks dubious.

It is difficult to see where the capital is coming from (other than the taxpayer) to support these projects.

The proposed buyers were 50 municipal power providers and in the end, they couldn't bite the bullet.

Nuscale also suffered time overruns, a project slated to be operational by 2023 delayed to 2029, by which time the cost of renewables should be even lower.

Australia Upping Focus On Polysilicon Manufacture

Green renewable energy infrastructure investor Quinbrook has committed to develop one of the world’s largest and greenest polysilicon manufacturing projects at the Lansdown Eco-Industrial Precinct in Townsville, Queensland at a cost of $8bn.

The plant will be powered by solar and battery storage. 

About 200 hectares have been conditionally located for the site in Townsville’s Lansdown precinct, reflecting the city’s ambitions to create an environmentally sustainable, advanced manufacturing, processing and technology hub.

Lansdown is situated near some of the best silica quartz resources in the world and Townsville has an export port.

Quinbrook is also partnering with Solquartz to develop a metallurgical silicon processing plant.

AuManufacturing observes Tindo Solar, a small player, is Australia’s only commercial manufacturer of polysilicon cells.

The move is consistent with growing onshoring of critical manufacturing from China and further fortifies north Queensland’s position as a renewable energy hub. 

China holds a virtual monopoly on polysilicon manufacturing and this came home to roost during covid, prices rising astronomically just as the Ukraine War sent oil prices sky high, sending many local solar companies to the wall.

China To Curb Methane Emissions

Speaking of China, the world’s largest methane emitter has committed to deploy technology to spot methane pollution, as well as boost data transparency, but did not set targets.

About 90% of China’s methane emissions come from coal seam gas mining, which is notorious for leakages.

At this stage, it appears to be more of a goodwill gesture following talks between the US and China’s climate envoys in California.

It was billed as a concession as the two major economies attempt to iron out their trade differences.

Such an outcome remains unlikely, given the energy sector accounts for up to 40% of China’s methane emissions, which is likely to seriously impact the nation’s capability to compete in a green trading world.

Cooking On Gas

Speaking of methane, one thing FNArena does ponder is the future of gas in cooking.

Recently, a group of Australian chefs and restaurateurs gathered to protest proposed curbs and tariffs on gas cooking, pointing out nothing can replace gas.

One would imagine that in China, where the wok is ubiquitous, such attempts would be met with riots.

Three-year Moratorium On Scope 3 Litigation

Are we there yet? Obviously not when it comes to emissions reporting.

The federal treasury has proposed a three-year moratorium on private litigation related to Scope 3 reporting – the most challenging of all emissions reporting – most likely because Australia’s companies are not yet ready.

The protections from litigation would also apply to forward-looking statements, scenario analysis and transition planning.

Under the proposed regulation, all large Australian companies will be required to disclose climate-related financial exposures from July 2024.

Smaller businesses will be required to follow in 2027-2028.

This does not mean companies are off the hook. 

The consultation plan includes provision for the regulator to act in circumstances it deems fit, and climate-related financial disclosure requirements would be drafted as civil penalty provisions in the Corporations Act.

Many litigators have expressed their displeasure, claiming the legislation would give greenwashers a free pass.

Also on the green regulation front, in Queensland, the Jones Review has recommended consideration be given to creating an offence for breaching the General Environmental Duty outlined in the Environmental Protection Act, finding the act does not sufficiently emphasise the importance of preventing environmental harm nor properly detail the consequence of breaches, such as remedying harm.

The Queensland government has indicated its support for the recommendations.

News Flash: US Passes Plan To Avert Shutdown

A coalition of US Democrats and mainstream Republicans have supplied the majority of votes needed to extend US federal funding through early 2024, removing another weight from the market.

The bill was approved under a special expedited procedure that required a supermajority.

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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