ESG Focus: Top ASX Companies, Superbugs & Hydrogen

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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/

Addressing challenges and opportunities in meeting the UN Sustainable Development Goals and what ESG characteristics underpin share prices

-Does governance make for better shareholder returns?
-Antibiotic resistance a major global problem
-Clean hydrogen remains a challenge
-Aging demographic challenges need AI and automation 

By Danielle Ecuyer

Intersection between ESG and performance

In some insightful proprietary ESG research by Macquarie on 242 ASX-listed companies covering 89% of the ASX300 market capitalisation, the broker details companies that produce higher ESG scores continue to align with generating better risk-adjusted returns.

The findings showed a relationship between Macquarie’s ESG rating system and share price performance. Starting in 2011, the research highlights the relative outperformance is 4.9% on an annualised basis, including the 2024 results, representing a rise from 4% in 2023 over the basket with the lowest ESG scores.

In 2024, Macquarie’s quant analysis shows the return for the highest ESG basket of companies at 21.2% versus the lowest ESG basket at 8.7%. This compares to the ASX200 at 15.3% for the 2024 annualised returns through to November 30, 2024.

Dissecting the components of ESG and their impact on scores, Macquarie establishes Governance holds a consistent relationship with shareholder returns.

On multiple metrics, governance scores confirm “superior returns,” including companies with positive revisions to governance scores generating excess returns of 1.8% p.a. over the last five years and 3% p.a. since the start of the analysis in 2011.

Macquarie states, “these findings support other research that the most quantifiable dimension is corporate governance as a means to assess the quality, credibility, and trust in management, and we find it offers the greatest potential for investors again here.”

Regarding Social, Macquarie finds a disparate relationship, with a strong correlation to excess returns for large companies but no statistically significant relationship with small companies.

The broker attributes the difference to workforce scale and the impact between communities, regulators, and other social metrics.

Large-cap companies with a higher social score have generated higher returns, with a cumulative return of 23% since 2011, compared to a negative -24% return for those with negative social scores.

Companies with positive social revisions also provide superior shareholder returns over the last five years and since 2011 by 3.4% and 1.6%, respectively.

The weakest relationship remains Environmental. Macquarie’s analysis showed companies with higher environmental scores since 2012 generated a cumulative return of 139% against 124% for the laggards.

In terms of companies, in the ASX100, Cochlear ((COH)), Brambles ((BXB)), Transurban ((TCL)), Wesfarmers ((WES)), Commonwealth Bank ((CBA)), Xero ((XRO)), Vicinity Centres ((VCX)), and Car Group ((CAR)) are all in the top ten high ranking.

Ex-100, Pinnacle Investment Management ((PNI)), Netwealth Group ((NWL)), Breville Group ((BRG)), and Monash IVF Group ((MVF)) ranked among the highest.

The Intersection of AI and “Superbugs”

Morgan Stanley examines antimicrobial resistance (AMR), cited as one of the top ten global public health threats. The World Bank’s 2017 research estimates an additional US$1trn in healthcare costs by 2050 and US$1trn to US$3.4trn in GDP losses per annum by 2030.

Lower-income countries face the greatest economic impact due to weaker healthcare standards and limited access to water, sanitation, and hygiene. A UK review in 2017 estimated AMR could cause 10 million deaths annually by 2050. The Lancet’s 2019 study attributed 1.27m global deaths to AMR and reported a 46% rise in antibiotic consumption between 2000 and 2018, contributing to resistance.

Morgan Stanley highlights two European companies addressing AMR. bioMrieux dedicates over 80% of its product range to AMR, focusing on ensuring patients receive the right drug at the right time. Fresenius SE, Europe’s largest private hospital operator (Helios), produces intravenous generic antibiotics through its Kabi division.

Biopharma firms including Boehringer Ingelheim, Roche, GSK, Johnson & Johnson, Moderna, Pfizer, Sandoz, and Sanofi are also investing. Water treatment firms such as Veolia Environnement and animal healthcare companies are equally tackling the issue. Zoetis is developing bacterial vaccines, while Elanco plans to invest over US$3.5bn to improve animal health.

Natural Hydrogen: “Geologic Gamechanger or Just Hot Air?”

To meet net zero targets, Morgan Stanley expects clean hydrogen to play a key role in energy, including green steel, methanol, ammonia, and long-distance transport. Natural hydrogen offers an alternative to costlier green hydrogen.

A US Geological Survey study estimates 5.6trn metric tons of hydrogen in underground reservoirs. The International Energy Agency projects global hydrogen fuel consumption at 420-440mt by 2050. While Air Liquide warns most deposits are too small for commercial use, Wood Mackenzie suggests investment from oil and gas firms could push natural hydrogen to 17mtpa by 2050.

Morgan Stanley expects green hydrogen to remain reliant on subsidies but to become more competitive as costs fall by -35% by 2030. The gap between natural and grey hydrogen remains significant.

Aging Populations Pose a Problem

Goldman Sachs proposes that aging populations and a shrinking productive labour force in developed countries will present both opportunities and challenges in achieving global Sustainable Development Goals.

The broker highlights several key challenges:

-The population over 65 is expected to double to 1.6bn from 800m by 2050, rising to 50% of the total global population from around 10% today.

-Falling fertility rates and a declining working-age population will challenge tax bases for industries and governments.

-A smaller labour force will struggle to support an expanding dependent elderly demographic.

In healthcare, 18% of the current US population is over 65 but accounts for 36% of healthcare spending, allocating over 13% of their total expenditure to healthcare, significantly more than younger demographics.

Older individuals also spend more on leisure, including RVs, cruises, motorcycles, and pets, and watch an average of six hours of TV per day.

Goldman Sachs identifies three key investment themes expected to benefit:

-Healthcare, including medical technology, pharmaceuticals, age-related treatments, and healthcare service providers.

-Senior living and care, encompassing long-term care facilities, assisted living, rehabilitation services, and technologies for independent living. ResMed ((RMD)) and Fisher & Paykel Healthcare ((FPH)) are highlighted among exposed stocks.

-Entertainment and experiences, including recreational vehicles, motorcycles, cruises, TV, and pets. Netflix, Fox Corp, and Nine Entertainment ((NEC)) are featured, with Fox and Nine on the buy-rated conviction list.

The broker outlines five potential solutions:

-Womenomics, an increase in female labour force participation.

-Education, reskilling, retention, and recruiting to extend workforce participation.

-Immigration, though currently facing challenges.

-Capital relocation, shifting industrial production to regions with expanding workforces.

-Automation and AI, emerging as solutions to workforce shortages across all sectors.

For more reading on the latest trends in ESG and AI, automation and robotics see:

https://fnarena.com/index.php/2025/01/22/esg-focus-challenges-hurdles-await-in-2025/

https://fnarena.com/index.php/2024/12/12/the-2024-gen-ai-xmas-special-incl-2025-outlook/

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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