ESG Focus: The Little Big Things – 18-09-2024

This story features DOMAIN HOLDINGS AUSTRALIA LIMITED, and other companies. For more info SHARE ANALYSIS: DHG

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/

August reporting season delivered a few positive ESG surprises while green sustainable houses are more fashionable than ever; plus BP published its 2024 energy outlook.

-Australian companies further embrace ESG measures
-Green homes save you money
-Savvy buyers see through green-washing
-Peak oil coming soon
-Battery manufacturers on notice
-ESG news: the good, bad and ugly

By Danielle Ecuyer

Sustainable green homes are more than a trend

Domain Group Australia ((DHG)) published a Sustainability in Property Report where the company focuses on sustainability trends in the residential sector. The 2024 report highlights a rising trend in the “motivation, adoption and reward” for investing in sustainable home features.

Stepping back, Australian homes represent around 10% of total carbon emissions including around 24% of overall electricity use. The report highlights an energy efficient home can reduce energy consumption, and save money.

Some interesting facts include a south-facing home needs three times the energy for heating and cooling than a north facing one; roof and ceiling insulation can save up to 45% on heating and cooling; wall insulation can reduce heating and cooling by -15% and window and door gap sealing can save -5% to -10% on heating and cooling.

A 7-Star energy rating will save around $450 p.a. on heating and cooling compared to a 6-Star rating with every new 7-Star rating new home built compared to a 6-Star rating equal to removing one car off the road for a year.

Thermal shell upgrades and full electrification of appliances is noted as generating an average savings of 43% to 51% on energy bills.

Domain states half of all houses have “green features” as well as over one-third of units. The share of green homes has risen over time and across most cities to circa 50% of houses which have green features, except Sydney at 38.7% compared to Canberra at 67.2%,

The “volume” factor for sustainable features are solar panels, featuring in roughly 43% of all homes sold.

“Green homes attracted 16.7% greater buyer interest and sold 4% quicker”.

Reporting season ESG metrics up for scrutiny

Macquarie turns to the August reporting season for an update on ESG metrics across its universe of researched companies.

The broker points to emission targets generally being “on-track” with 21 companies set to meet the interim emission targets and 21 on track with near-term net-zero targets, most of which are in the REIT sector. The broker evidenced what it refers to as “slippage” including Air New Zealand ((AIR)) which took back its 2030 SBTi emissions intensity target; Genesis Energy ((GNE)) where the FY25 target is potentially at risk from market conditions and Corporate Travel ((CTD)) deferred its 100% renewables target to FY30 from FY25.

Regarding scope 3 targets, the percentage of interim targets has been relatively stable at circa 70%, according to Macquarie, with the percentage increase in scope 3 targets up to 31% from 25% at the end of August 2023.

The broker observes more scope 3 supplier engagement targets including BHP Group ((BHP)). The Big Australian is targeting its top 500 direct suppliers by spend on setting greenhouse gas targets with 78% engaged to date. Coles Group ((COL)) is aiming for 75% of suppliers by spend to establish scope 1&2 science-based emission target reductions by the end of FY27, compared to 35.5% at the end of FY24.

In the Social category, Macquarie emphasises a “rapid increase in disclosure around psychological safety” with around 39 companies compared to roughly 8 companies in August 2023 mentioning this factor, including a broadening to all ASX sectors from resources and industrials.

Programs being initiated include risk assessments, training, education and well-being platforms. By way of example, BHP has started a Psychosocial Health Index which is expected to produce more meaningful data over time.

Throughout the August reporting season, six companies introduced ESG oriented metrics into management scorecards compared to 14 in FY23. Some 15 companies altered their ESG linked remuneration, and in total, ESG linked remuneration expanded to 73% of the ASX300, a rise from 71% in August 2023.

Australians are embracing sustainability

Global consultancy Simon-Kucher conducted over a 1000-person survey as part of a global report on the role of sustainability in major markets and consumer attitudes to sustainable products and services.

The survey found 61% of Australians prioritise sustainability as a top three factor for purchase decisions and it increases in industries such as energy and home improvements where there is a recognised link.

Consumers are also prepared to pay more for sustainable vehicles, consumer goods and in the construction sector.

Demographically, boomers represent the lowest average at 16% who are prepared to pay a premium for sustainable products, compared to 25% for Gen Z where the average premium varies between 41% to 46%. Gen Z is also more “sustainably aware” with around 75% considering the factor when making purchases.

Consumers are also very savvy when it comes to green-washing with 54% of customers believing brands are using green-washing. However, when brands are transparent and claims authentic, it results in customer loyalty and a competitive advantage.

Energy outlook under different emission targets

BP published its Energy Outlook 2024 which investigates two scenarios for the pathway to Net Zero. One aligns with the Paris IPPC climate goals and the second assumes a “significant tightening in climate policies”. The latter represents a decline of -95% in global emissions by 2050 while the current trajectory infers a “significant temperature overshoot”, with only a reducton of -20% in emissions over the same time frame.

BP assessed in both cases energy demand rises in the near-term, peaking in the middle of the 2020s because of efficiency improvements. In the Net Zero case by 2050, primary energy is forecast to decline by around -25%, lower than 2022, and in the current trajectory primary energy rises out to the mid-2030s from emerging economies and then stabilises at a level some 5% above 2022 levels.

Falling oil use for road transport has BP estimating peak oil demand by 2025 in line with last year’s report. It precedes the International Energy Agency’s medium term oil outlook for a peak in oil demand by 2029.

Under current projections, gas demand is expected to advance, supported by emerging countries, ex China, and will be about 20% in the mid-2020s and less than 50% of the 2022 level in 2050.

BP expects renewable energy (wind and solar) capacity on the current pathway to grow circa eight times the 2022 levels by 2050, and fourteen times in the Net Zero scenario.

Morgan Stanley also points to the new ESG guidelines which have been introduced by European regulators for fund managers on the use of ESG related terms.

The new guidelines impact an estimated 10% of investment funds in Europe with a minimum of 80% of investments to be invested in line with sustainability objectives of the fund to employ the use of ESG or sustainability terms in fund names.

The changes are anticipated to have the greatest impact on the Integrated Oil and Gas sector. 

Battery supply chains threaten ESG mandates

According to Ai supply chain risk platform Infyos, analysis of data reveals many of the world’s largest automotive, energy storage, consumer electronics and heavy industry, which use lithium batteries, may have human rights abuses in the supply chain.

The allegations involve companies mining and refining raw materials in China particularly in Xinjiang Uyghur Autonomous Region in northwest China.

The human rights alleged abuses and lack of transparency on supply chains could breach the United States’ Uyghur Forced Labour Prevention Act and the EU Battery Regulation law, according to Infyos.

The organisation highlights battery products remain at risk of being banned from the market as financial institutions and regulators are mandating better supply chain visibility and risk data. 

As a result, investors might be required to divest certain companies to meet ESG requirements.

More ESG news snippets

J.P.Morgan’s ESG Wire has highlighted Mario Draghi’s “The Future of European Competitiveness” report which aims for EUR750bn to EUR800bn of investment each year or around 5% of GDP on Innovation, Decarbonisation, Competitiveness and Security.

The broker notes some of the key aspects of the “Investing in sustainable agriculture” expert event included increased focus on soil preservation, sustainable products and services in the sector, including the use of satellite imagery to assist in sustainable outcomes while maintaining yields and food security.

Policy and regulatory changes highlighted include the European Union passing a 50% renewables “milestone” in the first half of 2024, according to the State of the Energy Union Report 2024. The share of Russian gas imports fell to 18% by June from 45% in 2021 with an accompanying decline in gas demand by 138bn cubic metres to May 2024 from August 2022.

The European Union also proposed to lower tariffs on Chinese made EVs. The new rate for Tesla will decrease to 7.8% from 9%. The highest rate falls to 35.3% from 36.3% with no change to BYD’s 17% tariff.

Due to lower expected offshore wind demand, the UK is planning to lower the 2030 target of 55GW offshore wind capacity.

China plans to include steel, cement and aluminum in its carbon markets by the end of 2024, which is aimed at weakening the impact from the EU’s carbon border adjustment mechanism.

On a less positive note:

-Summer 2024 (northern hemisphere) was the hottest on record breaking global heat records for the second year in a row.

-Antarctic sea ice is on the cusp of a record winter low for the second consecutive year.

-Almost 70 active wildfires have been burning across the US.

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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