ESG Focus: The Little Big Things – 10-07-2024

This story features COMMONWEALTH BANK OF AUSTRALIA, and other companies. For more info SHARE ANALYSIS: CBA

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/

Companies with good human capital management perform better than the pack; Macquarie Bank’s BIG GREEN investment push; Aussie banks tackle ESG targets; Qantas strives towards sustainability; the gold standard for net zero emissions targets is a challenge.

-Human capital management matters
-Labour’s victory in the UK, a green thumbs up
-Macquarie Group shares on their way to $600?
-ANZ & NAB update on ESG goals
-Qantas invests in Jet Zero
-The ins and outs of Science Based Target initiatives

By Danielle Ecuyer

Human capital management drives share performance 

Analysts have long sought to establish what the secret sauce is when selecting winning companies.

Enter Macquarie research of financial based data to support the proposition that human capital management is not only real and can be measured, but it also has a material bearing on the share price performance of a company.

The broker highlights an increasing amount of evidence to link human capital management to performance as well as it acting as a leading indicator.

Human capital management covers metrics such as staff turnover, absenteeism, pay and productivity, diversity, industrial disputes, and safety. Macquarie has collated an 18-year data base for the ASX100 with more companies added since 2014.

The latest study revealed Commonwealth Bank ((CBA)), Nick Scali ((NCK)), Santos ((STO)) and TPG Telecom ((TPG)) had the most improved scores in human capital management.

The companies with the highest scores overall were AGL Energy ((AGL)), ANZ Bank ((ANZ)), APA Group ((APA)), Brambles ((BXB)), Commonwealth Bank, Cochlear ((COH)), Goodman Group ((GMG)), JB Hi-Fi ((JBH)), Mirvac Group ((MGR)), REA Group ((REA)), Transurban ((TCL)), Viva Energy Group ((VEA)), Wesfarmers ((WES)), and WiseTech Global ((WTC)).

The Macquarie research showed the share prices of the portfolio of companies which scored highly on human capital management (the dynamic leaders) outperformed those share prices of companies where there is “room to improve”.

In fact, the dynamic leaders’ portfolio has generated 1.4% p.a. in annual outperformance since it started. When the analyst overlaid a momentum score, the level of outperformance rose to 3% per annum.

Macquarie points to the companies in the second portfolio with room for improvement, such as Domino’s Pizza Enterprises ((DMP)), Lovisa Holdings ((LOV)), Netwealth Group ((NWH)) and Seven West Media ((SWM)), as having the lowest scores.

Given these results, it is hardly surprising the unexpected resignation or departure of senior management can cause share prices to flag.

Labour victory in the UK and green policies

With so much political upheaval, many are starting to question the durability in specific climate change policies, ESG investing and sustainability factors.

Morgan Stanley points to both the Labour and Conservative parties remaining committed to the UK’s Net Zero 2050 goal. 

Labour’s victory means business as usual, with the cessation of its GBP28bn p.a. “green prosperity plan” being replaced by an estimated GBP4.7bn p.a. on low carbon energy.

The Labour Party is also proposing Great British Energy to “create jobs and build supply chains” for clean power, including the doubling on onshore wind, tripling solar power, and quadrupling offshore wind by 2030.

Some GBP1bn will be directed towards carbon capture and storage and GBP500m for green hydrogen manufacturing.

Long term security of nuclear power and the Small Modular Reactors are also part of the mix.

While you might be questioning why the UK election matters, look no further than Macquarie Group ((MQG)).

Barrenjoey has undertaken a “deep dive” into the clean green world of Macquarie’s asset management division.

Against the backdrop of McKinsey’s forecast that US$275trn or 7.5% of global GDP from 2020-2050 will need to be invested to achieve net zero emissions by 2050, Macquarie has the goal of becoming as large in green energy asset management as in infrastructure within 10-years.

Due to the capital-intensive investment required for the development and operating expenses of green assets, Macquarie has evolved to an asset management model. By shifting the Green Investment Group to Macquarie Asset Management from Macquarie Capital, external investing parties can now participate, thereby reducing balance sheet funding pressures.

The bank’s current capacity stands at 110GW, split 98GW in development/construction. 

Under the new structure there are several funds, including Macquarie Green Investment Group Renewable Energy Fund (1&2), UK Climate Investments, as well as the Macquarie Green Energy and Climate Opportunities Fund, and the Macquarie Green Energy Transition Solution.

The funds have different mandates across varying technologies, both mature and emerging, and at different stages of development.

On its balance sheet, Macquarie retains Corio a global wind developer with a 30GW pipeline and Cero, a solar specialist with a 25GW portfolio of solar and storage across Europe. Both these assets are slated for divestment at some stage.

Corio has exposure across Asia, South America, Europe, Asia, Australia, and the US.

Cero’s exposure includes Greece, Italy, Poland, Spain, France, and the UK.

From an earnings perspective the Corio and Cero portfolios are not expected to yield the scale of contributions from FY22 and FY23, the CEO has publicly stated.

The off-balance sheet funds will generate fees from green energy and Macquarie can invest in them. Barrenjoey has not included any income from fees until FY29.

The bottom line for Macquarie Group’s earnings

Macquarie Group has transitioned into the world’s largest infrastructure manager with equity under management of $213bn (half is in Europe). Barrenjoey calculates this could grow to $567bn if it compounds revenue at 10% per annum.

Macquarie’s goal is to become as large in green energy, which Barrenjoey views as “very challenging” but not beyond possibility.

For those of you who like blue sky forecasts, the analyst calculates around 40% upside to existing Macquarie earnings estimates, which would equate to around a $600 target price.

For now, shareholders and investors can return to Terra firma with an Overweight rating and a $210 target price.

Among brokers monitored daily, Morgan Stanley has a $215 target price with an Overweight rating.

Citi is more conservative with a target of  $176 and a Sell rating. The average target from daily monitored brokers is $193.08.

ANZ and NAB 2024 ESG updates

JP Morgan used the latest ANZ Bank((ANZ)) ESG update to reaffirm its Neutral rating on the company.

The bank’s seventh annual ESG offering, highlights three pillars of strategic emphasis by management.

As the bank continues to build its mortgage lending for the retail division, pressures on net interest margins (NIMs) remain.

From an ESG perspective, ANZ remains committed to supporting the increase in supply of social and affordable housing. Out of the $10bn target investment by the end of FY30, the bank has to date delivered on over $5.7bn of funding in affordable housing from 2018 to mid-March 2024. 

The second pillar focuses on the goal of 2.5m customers in A&NZ with a financial buffer by the end of FY26.

Via government and community organisation partnerships, the program has assisted 60,000 lower-income Australians save over $29m.

The last pillar rests on the aim to fund at least $100bn in social and environmental outcomes through direct investments and customer activities by the end of FY30, including transition plans to net zero.

Macquarie highlights ANZ has $8.8bn in progress.

In comparison, National Australia Bank ((NAB)) has a recently stated $80bn environmental finance target from October 2023 to 2030, with an undisclosed amount of funding in progress.

CommBank has a $70bn target, set in 2021 with $44.7bn in progress, while Westpac Banking Corp ((WBC)) set new sustainable finance targets in November 2023 of $55bn in lending and $40bn of bond facilitation across Green, Transition, Social and Sustainability areas.

NAB’s latest residential real estate emissions intensity target of a -56% reduction in emissions intensity to 15.4kg CO2/m2 by 2030 is in line with Westpac and approaches CommBank’s 15.7kg CO2/m2.

While NAB’s commercial real estate office emissions intensity target is a -58% reduction to 29.6kg CO2/m2 and 32.6% CO2/m2 by 2030 for office and retail.

Macquarie notes NAB’s targets are lower than ANZ’s but higher than Westpac’s.

Nab’s transport targets are a reduction to 133g CO2/vehicle km by 2030 from 2022.

Regarding agriculture, NAB deferred its agriculture target due to problems in data collation across such a wide-reaching portfolio.

Qantas’ fleet renewal a boost for sustainability goals

Macquarie hosted Qantas Airways’ ((QAN)) Chief Sustainability Officer and team for an ESG update highlighting the 2030 sustainable aviation fuel target of 10% which is a key decarbonisation driver.

The airline’s decarbonisation goals are split one third from sustainable aviation fuel, one third fleet renewal/operating efficiency, and one third from offsets.

Fleet renewal is viewed as a “driver of lower emissions”, although supply chain problems are creating challenges even though the renewal is oriented more to Airbus.

Offsets will remain important with direct investments through the Qantas’ $400m climate fund, including the Western Australian wheat belt project.

Waste reduction is curbed by quarantine restrictions, but Qantas aims for net zero single us plastic by 2027 and zero general waste to landfill by 2030.

Sustainable aviation fuel is challenging, and Qantas believes the 10% mandate for 2030 is not achievable with a 5% target considered more realistic. The latter has been proposed to the government. Some form of subsidies will be required for the next five to ten years.

Qantas has invested in Jet Zero to develop Australia’s first alcohol-to-jet-fuel facility in Townsville. This facility is forecast to produce around 100m litres of sustainable aviation fuel per annum.

Pricing as indicated by Jet Zero stands around $4.08 per litre, some two-and-a-half to three times the cost of conventional fuel, which could deliver circa -70% reduction on CO2 emissions against traditional aviation gas.

Macquarie has an Outperform rating and a $6 target price on Qantas.

The FNArena average broker target price is $6.683 with one Buy, one Hold, an Add and an Overweight from UBS, Ord Minnett, Morgan Stanley, Morgans, respectively.

Aligning Australian companies with Science Based Targets Initiative

Jarden considers Science Based Targets Initiatives (SBTi) as the “gold standard” for Corporate Net-Zero Standard frameworks as it aligns targets with climate science.

Using sixteen assessment criteria, the broker classified Australian listed companies as “aligned” if the targets are SBTi validated or in the process of validation.

Companies are “not aligned” if they do not meet all the requirements.

Jarden stresses the challenges and complexities for companies to comply with SBTi, particularly in the fossil fuel sector, due to a lack of suitable guidelines.

In conclusion, 70% of the ASX50 companies do not align with SBTi, with the main issue being incomplete Scope 3 inventories.

The 30% or 15 aligned companies included eight in the process of seeking validation; Aristocrat Leisure ((ALL)), Fortescue ((FMG)), Origin Energy ((ORG)), Ramsay Health Care ((RHC)), Stockland ((SGP)),  Sonic Healthcare ((SHL)), Telstra ((TLS)) and Woolworths Group ((WOW)).

NAB, Seek ((SEK)), Westpac and Xero ((XRO)) align with SBTi but aren’t seeking validation.

Brambles ((BXB)), Newmont Corp ((NEM)) and Transurban Group are validated.

Jarden highlights the challenges for mining companies to commit to SBTi.

The broker concludes there is no one size fits all for the approach to target setting and different companies could use the SBTi framework differently. It believes non-mining companies should at a minimum seek to align with the SBTi standard to assist in net zero target setting and climate risk management.

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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