ESG Focus: Challenges & Hurdles Await In 2025

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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/

Politics and elections have the potential to upend near-term carbon abatement targets and ESG strategies, so what’s on the menu for 2025?

-A changing of the ESG guard?
-Major ESG themes in 2025
-Cleantech investment opportunities in 2025
-Do great workplaces make great companies?

By Danielle Ecuyer

Politics and elections in 2025

Macquarie takes aim at the potential for policy changes in Australia, with the federal election due to be held on or before May 17.

Under a Coalition Party victory, the broker highlights Australia can expect a revision to the 2030 emission reduction target of -43% on emissions against 2005 levels, which would limit the impacts on the mining, agriculture, and energy sectors. The Coalition at this stage remains committed to a net-zero ambition by 2050.

Apart from the Coalition’s proposed nuclear strategy, there are plans for growing support for new natural gas production and infrastructure such as storage and pipelines. AGL Energy ((AGL)), Origin Energy ((ORG)), and other energy utilities have been advocating for gas as a transition fuel, given the timeline of expected coal-fired plant closures. Origin’s Eraring plant could have its life extended to 2029 from 2027.

AGL’s Bayswater plant is due to close between 2030 and 2033 and Loy Yang A Power Station by June 2035.

The Coalition is also expected to examine the safeguard mechanism, Macquarie notes, which could involve more “flexibility” for emission-intensive industries, including delaying timelines for emission reductions.

Twenty-seven companies are subject to the safeguard mechanism, including Ampol ((ALD)), APA Group ((APA)), Aurizon Holdings ((AZJ)), BHP Group ((BHP)), Evolution Mining ((EVN)), Fortescue ((FMG)), Iluka Resources ((ILU)), Incitec Pivot ((IPL)), Newmont Corp ((NEM)), Northern Star Resources ((NST)), Orora ((ORA)), Origin, Qantas Airways ((QAN)), Rio Tinto ((RIO)), South32 ((S32)), Santos ((STO)), Viva Energy Group ((VEA)), Wesfarmers ((WES)), and Whitehaven Coal ((WHC)) in the ASX100.

The Coalition also opposes a carbon price/tax and/or emissions trading scheme. Liberals and Nationals believe such schemes are too hefty an imposition on businesses and raise the cost of living. Macquarie suggests incentives would be the more likely approach for investment in clean energy technologies, such as carbon capture and storage, hydrogen, and battery storage.

Removing mandatory climate reporting in favour of more “flexible” schemes would be likely, with increased investment in climate adaptation and resilience, particularly for communities more exposed to floods and wildfires.

A focus on Indigenous housing and the launch of a Royal Commission into Sexual Abuse in Indigenous communities are also highlighted by Macquarie.

Trump 2.0 and Potential Changes

Trump’s return could bring wide-reaching ramifications, detailed by Macquarie:

-A potential slowdown in momentum behind climate initiatives, with the US likely to withdraw from the Paris Agreement and remove climate protection policies (both are now in place)

-Climate litigation may start to rise again in the US, and there may be less US climate collaboration

-A rise in support for fossil fuels and a reduction in clean energy support. More risk is viewed by the broker around EV tax credits and home-energy rebates than for carbon capture and storage, hydrogen, and clean fuels

-An increase in protectionist policies via tariffs. Australia’s largest US exports are gold, beef, other agricultural products, and pharmaceuticals. Alcoholic beverages, aluminium, iron, and steel represent a smaller value of exports

-Changing supply chains resulting from on-shoring and re-shoring

-Removal of DEI (diversity, equity and inclusion) policies

Sustainable Investing and ESG in Focus

Sustainable investing will also be in focus in 2025. Macquarie details how US fund managers have been moving away from sustainability collaborations due to anti-trust concerns and rising litigation around climate-related policies.

BlackRock announced it would withdraw from the Net Zero Asset Managers initiative in early January, and the structure is being reviewed to ensure it remains “fit for purpose” given the changing macro backdrop.

A number of major US banks also withdrew from the Net Zero Banking Alliance, including JPMorgan, Bank of America, Morgan Stanley, Goldman Sachs, and Wells Fargo. The alliance has 141 institutions remaining, including European banks, representing around 40% of global banking assets.

Anti-trust concerns have also been raised for Climate Action 100-plus, which has resulted in several investment firms leaving, including Alliance Bernstein, JPMorgan, and Goldman Sachs. The organisation still has more than 600 remaining members.

Regarding global sustainable funds, Macquarie points out Responsible Investment Association-certified funds have generated 10-year returns of 13.2% per annum compared to 9.19% for the rest of the market.

Six of the major ESG themes in 2025

Jarden highlights the urgency of climate change risks, noting 2024 was the warmest year on record and referencing the Los Angeles wildfires. Australia remains at high risk of bush fires in 2025, the analyst notes.

Mandatory climate laws are coming into effect in 2025 domestically, barring political changes, which will push companies on climate and net-zero policies.

Jarden points to challenges with such policies due to high costs, a lack of demand, and the absence of “green premiums,” causing issues for companies like Fortescue, Origin, and Woodside; all reduced their green hydrogen commitments in 2024. Air New Zealand ((AIZ)) also removed its 2030 emissions target, in part due to the cost of sustainable jet fuels.

Jarden believes more companies will “walk back” their targets as 2030 approaches because of costs and technological issues. Increasingly, companies are encountering obstacles and challenges in measuring Scope 3 emissions (those generated through the supply chain).

Methane gas is becoming a significant focus for decarbonisation across oil, gas, and waste management companies.

Jarden also highlights environmental issues, including pollution, impacts on nature, water scarcity, and plastics, as growing concerns for regulators and communities. Programs like the Taskforce on Nature-related Financial Disclosures are encouraging companies to analyse their impacts on nature as well as their interdependence with natural ecosystems.

Companies such as Brambles ((BXB)), GPT Group ((GPT)), Qantas, and Telstra Group ((TLS)) are committed to adopting the program for FY25 and FY26.

Water scarcity and its crossover with Indigenous communities, as well as mining companies, data centres, and nuclear power generators, will continue to grow in importance as climate change accelerates, the broker highlights.

Jarden expects ongoing industrial issues and wage impacts to continue into 2025 from 2024, with Australian companies likely to pay close attention to gender diversity goals post-President Trump’s inauguration.

AI and ESG Integration

The growing use of artificial intelligence and machine learning is evident, with AI mentions rising significantly during the August 2024 reporting season. Jarden believes AI governance is essential for addressing issues such as data centre energy use, ethical considerations, and new regulations, including the EU AI Act. AI is also playing an increasingly important role in ESG data collation, reporting, and supply chain management.

Jarden points to increased demand from investors for CEO accountability, focusing on integrity, conflicts of interest, shareholder protections, and avoiding conflicts of interest.

The broker stresses the uncertainty around regulations and political changes, including the Trump administration, which will likely impact ESG and the Inflation Reduction Act. Domestically, the Coalition’s energy plans will be in focus. Changes in Australian energy policy create more uncertainty for companies, the broker suggests.

Clean-Tech Sector Opportunities

Deirdre Cooper, Head of Sustainable Equity at Ninety One, an active global investment manager with GBP130.2bn in assets under management at the end of 2024, details the challenges and opportunities for the clean-tech sector as President Trump’s term commences.

Cooper explains how higher interest rates and negative sentiment toward the clean-tech sector weighed on stock performance in 2024. Policy uncertainty following the US election exacerbated the negative sentiment.

Still, the current backdrop potentially represents opportunities for investors with a longer-term investment horizon:

“This may be the third major sentiment cycle’ I’ve witnessed in my career. Sentiment towards clean-tech sectors also became extremely negative in 2009/10, 2013/14, and 2014/15. However, history shows that such periods often represent some of the most compelling entry points into decarbonisation companies.

“While this part of the equity market may be out of favour, most investors still ascribe some probability to a transition to net zero, not least because of the increasing frequency of extreme weather events.

“And if we are going to address carbon emissions and move along the net-zero pathway, that will be a tailwind for companies enabling decarbonisation. We think investors are likely underappreciating the future growth from decarbonisation companies, making this an attractive, countercyclical entry opportunity.”

Cooper highlights the importance of distinguishing between headline statements from the US administration and actual policy decisions. For instance, a quick withdrawal by the US from the Paris Agreement will likely impact sentiment but not company forecasts. Cooper believes the Inflation Reduction Act is more significant, with bipartisan support likely making it harder to fully dismantle it.

Even if the Act is repealed, Cooper notes the largest renewables producer in the US has secured four years of tax credits, which will provide protection against potential impacts.

Tariffs are viewed as a headwind, particularly with potentially higher US interest rates and given the substantial investment required for decarbonisation. Deregulation of the US planning system, however, could be a positive and accelerate renewable infrastructure projects.

China continues to present decarbonisation opportunities. Cooper notes investments in companies with strong positions in China’s large and fast-growing domestic clean-tech market, as well as those well-positioned to export to countries like Thailand, Brazil, Vietnam, and India.

Technological innovation is another supportive factor for decarbonisation, with advancements such as improved battery technology extending EV ranges to up to 1,000km, helping to alleviate range anxiety.

Cooper identifies several areas of interest for investment:

“Areas where we are finding particularly interesting companies include those supporting the power needs of AI and hyperscale data centres. These include developers of renewable energy, battery manufacturers, and firms supplying efficient electrical and cooling equipment, and handling the permitting and planning for new data centre projects.”

Morgan Stanley and Decent Work (SDG 8)

Morgan Stanley examines the eighth UN Sustainable Development Goal (SDG): “Decent Work and Economic Growth,” which aims to promote sustained, inclusive economic growth, full employment, and decent work for all. Key focus areas include equal pay for equal work, labour rights protection, and actions against child and forced labour.

The broker uses quantitative screening to identify companies aligning with SDG 8. Key performance indicators include average wages, working hours, and temporary contract usage.

Research from the Drucker Institute, Forbes, and Fortune highlights notable benefits of better corporate culture:

-Higher Retention Rates: Companies listed among Fortune’s 100 Best Companies to Work For have half the turnover rate of their peers.

-Lower Burnout Levels: Employees at top workplaces report higher well-being.

-Faster Innovation: Companies with inclusive workplace cultures report median annual revenue growth over 5% higher than those in the bottom quartile.

-Resilience During Recession: Companies with thriving workplaces saw stock price increases of 14.4% during the 2007-09 recession, compared to a -35.5% decline for the S&P 500.

-Higher Stock Returns: Historical data show annual stock market outperformance of 2-3% for companies on Fortune’s Best Companies lists.

Morgan Stanley lists notable companies aligning with SDG 8, including Cisco, Salesforce, Hilton, AbbVie, Accenture, Nvidia, and Adobe. In 2024, these companies outperformed the S&P500 total return index by over 49% on a weighted basis.

On an equal-weighted basis, the stocks outperformed the equal-weighted S&P500 total return index by approximately 12%. Morgan Stanley also noted the stocks on the list trade at higher valuation multiples, with an equal-weighted average price-to-earnings premium of 20-30%.

The latter might just be music to FNArena’s Editors’ ears!

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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