ESG Focus: The Little Big Things – 06-08-2024

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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/

The methane emission challenge for Australian energy companies; July ESG highlights; gender, diversity and inclusion in focus; Martin Currie on the ESG challenges for investors plus energy demand and data centres.

-Australia behind the curve on methane emissions
-The changing landscape of decarbonisation
-Companies dealing with the gender pay gap
-Engaging on ESG ambitions
-Data centres threaten emission targets

By Danielle Ecuyer

Macquarie ESG July updates

Keeping a finger on the pulse Macquarie highlights recent changes in the ESG space.

On the corporate front, South32 ((S32)) is appealing against conditions set by the WA EPA on its Worsley Alumina mine on the basis that the conditions exceed reasonable measures for managing environmental risks.

One of the key points of contention is the EPA requirement to ensure the hectares of rehabilitation of areas mined is equivalent or greater than the hectares of clearing of native vegetation for mining.

The Macquarie analyst believes the issue may be resolved, with both a fiscal and time cost to the company.

Foreign Investment Review Board (FIRB) approval was also received for the divestment of Illawarra Met Coal which is viewed as “de-risking” the company via coal divestments, leaving it exposed to aluminum, copper, zinc, nickel and manganese.

The transaction is expected to conclude in 1Q25 with US$1.05bn payable on completion.

Fortescue ((FMG)) received considerable media attention for organisational restructuring which “de-prioritises” the shift to green hydrogen by 2030.

The company has abandoned its green hydrogen goal of production of 15m tonnes by 2030 which includes the possible release of 700 employees.

Fortescue management stressed there is a role for green hydrogen across multiple sectors such as green iron, fertiliser, and shipping fuels, but its near-term focus would be concentrated on lower energy costs and improving the economics of the challenges at hand.

Macquarie’s resource analyst reaffirmed the view green hydrogen is a challenging and costly business, while those investors with a strong energy tilt or ETFs with a hydrogen exposure will be the most likely to sell exposure to Fortescue.

Origin announced the stage 2 of the Eraring battery at a cost of -$450m which is lower than stage 1 at a -$600m cost, although stage 1 offers double the capacity. Origin’s head of energy supply notes the size and scale of the battery infrastructure will have the capacity to absorb excess solar generation in daylight hours and discharge electricity in the evenings for peak demand periods.

The Macquarie utilities analyst anticipates the NSW battery market will be 3.9GW post stage 2, and up to around 13GW by FY27 at the end of the life of Eraring. 

HMC Capital ((HMC)) confirmed its intention to raise $2bn for the Energy Transition Platform in 2H2024. The Macquarie REIT analyst expects the platform could increase beyond $5bn in funding with offshore espansion.

Regarding nickel, Macquarie highlighted the suspension or closure of several nickel mines,; the BHP Group ((BHP)) operations being the latest announcement, due to low-cost overseas prices impacting on domestic nickel operations.

From an ESG perspective, Macquarie’s observations of the cheaper Indonesian nickel supplies highlight a more carbon intensive process due to the lower grades compared to Australian nickel; the Indonesia nickel deposits are in environmentally significant areas, like rainforests, and animal habitats. while health and safety issues are more pronounced.

Although electric vehicle manufacturers want “greener” nickel products for battery supplies, they are currently not prepared to pay the premium pricing.

Macquarie states Nickel Industries ((NIC)), which produces low-cost nickel, may benefit from the Australian closures, but still confronts the ESG challenges.

The Australian government also announced a $65m investment under the Carbon Capture Technologies Program into seven projects involving emerging technologies in the likes of direct air capture.

Calix ((CXL)) was awarded $15m to produce methanol from carbon dioxide in cement production.

In partnership with Orica ((ORI)), MCI Carbon was awarded $14.5m. Its carbon capture operations on Orica’s Kooragang Island ammonia facility captures around 1000t of carbon dioxide annually to produce building materials.

Woodside, Beach and Santos all have carbon capture and storage projects.

Some $91m was also allocated from the Federal Government under the Powering the Regions Fund for six clean energy projects designed to remove over -1mt of pollution.

Incitec Pivot ((IPL)) received $28m for a solar and battery storage system at its fertiliser plant at Phosphate Hill. 

The Wesfarmers ((WES)) sodium cyanide plant at Kwinana received $7.5m for a low emission waste gas incinerator.

The Geelong Viva Energy ((VEA)) refinery achieved $3m for electrification and $5.4m was given for energy efficiency upgrades at the Rio Tinto ((RIO)), 75% owned Boyne Aluminium Smelter in Gladstone.

Methane emissions on the nose

Jarden rightly points to the “methane challenge” for Australian companies. Methane is reported as 28 times more potent than carbon dioxide in terms of warming intensity and it represents around 29% of Australian greenhouse gas emissions.

Jarden highlights the urgency of the challenge. The natural gas sector contributes some 43% in methane emissions, and the agriculture sector stands at 44%.

In abatement, Australia is lagging the US and Europe as well as legislation on methane emissions, although it has committed to the Global Methane Pledge to reduce emissions by at least -30% below 2020 levels by 2030.

Jarden’s assessment of Australian companies

The broker has assessed six companies, Woodside Energy ((WDS)), Santos ((STO)), Origin Energy ((ORG)), Beach Energy ((BPT)), Karoon Energy ((KAR)) and Cooper Energy ((COE)) regarding methane management across ten criteria.

Woodside came in as the leading company. Woodside has reduced its methane emissions to 0.29 tonnes methane/kt of production in 2023 from 0.45 tonnes methane/kt in 2021.

The improvement is highlighted via better compressor seals and remediation of a leak at the Karratha gas plant.

Santos is rated as next with a reduction in emissions from reduced flaring and fugitive emissions or emissions accidentally released through work processes. Santos has lowered its methane by -6% between 2022 and 2023.

Jarden highlights Woodside and Santos are part of some of the global commitments for methane reduction.

Regarding Origin, the emissions are categorised as “venting and leaks” from the company’s 27.5% shareholding in APLNG.

In terms of reductions, Origin is looking to equipment and device replacement for improved technologies.

By comparison, Beach, Cooper and Karoon Energy are far less advanced.

Beach has a reduction in methane target and is also considering joining international methane initiatives, Jarden highlights.

Karoon reports its emissions in a carbon dioxide equivalent format, which includes methane emissions, and some 60% orf reported emissions are generated from flaring and fugitive emissions.

Cooper doesn’t report emissions and has no targets or alignment with global methane commitments.

On balance, Jarden believes Woodside is leading the methane challenge. There remains a risk the Australian government will become more proactive on methane emissions.

While a methane price, as is the case in the USA, is deemed as unlikely, more specific regulations on reporting could be included as part of the Safeguard Mechanism for the coal, oil and gas industries.

Jarden considers the biggest challenge for government is how residual methane emissions are reduced or abated and whether the use of carbon credits is “appropriate”.

Gender in the workplace

Morgan Stanley‘s annual Diversity, Gender & Inclusion report focuses on female gender diversity because of the long-standing data available.

The report found female participation in the workforce increased to 63% in 2023, a rise of 0.4points on 2022. Participation for the financial sector rose 2.7points to 41%; resources down -1.7points to 26%; defensives up 1point to 38% and cyclicals up 0.8point to 32%.

In terms of the Holistic Equal Representation Score (HERS) Model, Australia tracks female participation across boards, executives, managers and employees for companies covered by Morgan Stanley.

Companies with the largest improvement in HER Score in 2024 against 2022 were (in order of highest to lowest), Seek ((SEK)), IDP Education ((IEL)), Cochlear ((COH)), ASX ((ASX)), Macquarie Group ((MQG)), Iluka Resources ((ILU)), APA Group ((APA)), GPT Group ((GPT)), Whitehaven Coal ((WHC)), National Australia Bank ((NAB)), Origin Energy, QBE Insurance ((QBE)), Domino’s Pizza Enterprises ((DMP)), CAR Group ((CAR)), Ansell ((ANN)), Aristocrat Leisure ((ALL)), Cleanaway Waste Management ((CWY)), South32 ((S32)), Beach Energy ((BPT)) and TechnologyOne ((TNE)).

The stocks screened for growth and HERS improvement over the past two years came up as IDP Education, Cochlear, Aristocrat, TechnologyOne, Netwealth Group ((NWL)), James Hardie Industries ((JHX)), Northern Star Resources ((NST)), ARB Corp ((ARB)), Webjet ((WEB)), Paladin Energy ((PDN)), Breville Group ((BRG)), Alumina Ltd ((AWC)) and Corporate Travel Management ((CTD)).

Turning to the Gender Pay Gap (GPG), it came in at 21.7% for FY23 against 22.8% for FY22 with the construction industry at the highest percentage at 28.3% followed by financial and insurance services at 26.2%.

The UK introduced mandatory GPG reporting in 2017, and Morgan Stanley stresses the median GPG fell to 14.3% in 2023 from 18.4% in 2017.

Interestingly, companies with larger employee numbers have lower GPG against companies with smaller numbers of employees. Many companies, according to Morgan Stanley, attribute the GPG to workforce composition, rather than pay gap disparity.

On balance, the broker believes gender diversity is a long-term investing theme and anticipates more focus on this theme as part of the ESG mandates.

The seven ESG challenges for ASX companies

Martin Currie outlines the challenges for ASX companies with the climate transition coming in as a number one issue. As an investor, Martin Currie will be using the new carbon data sets as part of the government’s mandatory climate disclosures for scope I and 2 emissions from major emitters and large organisations (starting July1) to challenge companies on reduction targets; or to push companies to more thorough Science Based Target Initiatives.

Although natural capital might be less in focus, Martin Currie believes companies should focus on the long-term impacts of “de-prioritising biodiversity” using the company’s internally developed Natural Capital best practice framework’.

When it comes to workplace safety, the investment manager rates companies more highly when they are more forthcoming on workplace safety. The health and safety of employees is viewed as just as important as business growth and profit generation.

Martin Currie will be seeking improved outcomes for first nations people through a combination of commitments from companies and tangible outcomes for first nation communities.

Gender diversity is also a priority to achieve improved gender balance across workforces. Building a diverse and inclusive culture at all company levels is considered an essential part of long-term business success.

Martin Currie has established those companies which are the most transparent on modern slavery usually invest more in mitigation and have the most positive impact. 

Greenwashing remains an issue with sustainability assessed as much more than a marketing tool, it needs commitment and corporate action. Martin Currie will be engaging on issues of sustainability where unsubstantiated claims are made by companies.

Energy hungry data centres

With question marks arising about the durability of investment in Gen.Ai infrastructure, Morgan Stanley’s European telco team recently upgraded the forecast growth in data centre to six 6 times or 38GW by 2035 from five times previously.

The broker believes energy and planning constraints in existing large data centre markets are driving growth of secondary data centre markets in Europe, the US and Asia.

The increased data centre capacity equates to an additional circa 270TWh of power demand by 2035 with some 60TWh coming from Ai.

The percentage of data centre power demand is forecast to rise to over 8% of total European power demand from around 1.5% currently and underwrite higher European power prices of Eur5/PWh.

Turning to Asia, Morgan Stanley forecasts power demand from Ai and “traditional” data centres will double by the end of the decade to 50GW.

An estimated 68GW of new power generating capacity will be required as data centre demand grows to 8% of the total.

A forecast circa 26GW of gas and nuclear power will be needed for baseload support.

China has established energy usage targets for data centres, with a decline in average power usage and a 10% increase in renewable energy use.

Notably in the US, the Rhodium Group has pointed to higher power data centre demand as reducing the rate of US emission declines.

Morgan Stanley also highlights reports of Washington state’s clean energy targets being adversely compromised by data centre power demand.

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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