ESG Focus: War Accelerates Energy Transition

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Middle East conflict accelerating the global energy transition, although it's not that easy; Macquarie's fossil fuel financing questioned; US slavery tariff exposes Australian weakness; winners & losers in human capital management.

• The energy supply shock has sparked a pick-up in renewable investment
• The trouble with green jet fuel and diesel
• Macquarie challenged on fossil fuel financing
• US slavery tariff exposes Australia as a laggard
• Winners & losers in human capital management
• Copper a potential 'winner' from El Nino

By Greg Peel

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 Trump Climate Paradox

The Trump paradox is that the US –-in retreating from ESG at home-– has inadvertently become one of the more powerful forces shaping Australia’s ESG trajectory, compressing timelines that domestic policy was moving through more gradually, Jarden reports.

Trump is a vocal climate change denier, famous for his entreaty to “drill baby, drill” and his claim that green energy is a “scam”.

Washington’s retreat from multilateral climate cooperation and the Middle East conflict has repriced energy security risk.

The Middle East oil crisis has achieved what years of decarbonisation policy could not –- making renewable-powered and electrified operations a financial advantage in real time.

Companies that had already reduced their fossil fuel exposure are seeing that translated directly into cost insulation, while the crisis is pulling electrification and biofuels capex forward on pure economics across industries.

Jarden point out some of the early leaders in the mining sector include: Bellevue Gold ((BGL)), on track for an FY26 annualised run-rate of 80%-90% renewable energy; Fortescue ((FMG)), which has committed to eliminate fossil by 2030; and Liontown Resources ((LTR)), which is operating Kathleen Valley on renewable power stations at around 80% renewable penetration.

The Tough Ones

Aviation has no credible current near-term alternative to liquid fuel, Jarden notes, making Sustainable Aviation Fuel (SAF) its primary decarbonisation lever, yet Australia’s SAF market is largely non-existent.

Mining consumes around 35% of Australian diesel but has a growing electrification pathway that, on current economics, looks like the stronger option.

Diesel and jet fuel are chemically almost identical, Jarden points out, so a single plant can make either or both simply by changing a setting in the distillation column. That shared chemistry helps where it builds economies of scale, but it also sets the two products competing for the same feedstocks.

As demand for petrol declines, with electric vehicles accelerating that decline, and as diesel demand peaks around 2030, experts expect jet fuel to take over the liquid-fuel mix, moving from the least consumed liquid fuel in Australia today to the most consumed by the mid-2040s.

Australia’s SAF and renewable diesel market is largely non-existent and the reason is not that the technology is difficult (SAF is already produced at volume from used cooking oil across the US and Asia, Jarden notes), the issue is that without a committed buyer a project cannot be financed. SAF is simply more expensive than conventional jet fuel.

Australia’s current approach is simply to offer grants, while the US subsidises SAF down to fossil-jet parity (carrot), the EU compels it through mandates backed by penalties (stick), and the UK combines the two.

Australia offers nothing on the demand side. Grants help fund capital rather than secure offtake. The government has confirmed it would consult on biofuel demand-side mandates with a policy possibly ready by year-end.

Qantas Airways ((QAN)) suggests both carrots and sticks are required to develop an Australian industry, with the carrots needing to be bigger than the grants currently available to projects.

As for diesel, mining now accounts for some 35% of Australian diesel consumption and the intensity of that consumption in open-cut coal mining is rising, by somewhere between 12% and 51% across major miners over four to five years.

This is despite production being broadly flat, as operations push into deeper, higher-strip-ratio ground over longer hauls.

Biofuels suit aviation while mining leans toward electrification, experts believe.

To that end, Macquarie reports BHP Group ((BHP)), Rio Tinto ((RIO)) and Caterpillar ((SGH)) have undertaken three months of onsite testing of battery-electric haul trucks in the Pilbara.

The next phase of the trial will involve dynamic charging (energy transfer system to charge trucks while in motion).

Both companies in 2025 delayed decarbonisation capex spend with BHP noting that progress in reducing Scope 1 emissions, particularly through diesel displacement, has been slower than anticipated.

Macquarie Under Scrutiny

Ahead of Macquarie Group’s ((MQG)) AGM later this month, Market Forces (MF), an environmental finance campaign group, has asked Macquarie to confirm whether it remains committed to aligning its financing with the global goal of net zero by 2050 and disclose how it assesses its fossil fuel financing against that commitment.

This is in the context of the absence of previously stated net zero commitment language in Macquarie’s 2026 reporting, rising fossil fuel exposure, weakening fossil fuel finance policy guardrails, and Macquarie’s active role backing new gas expansion.

MF notes MQG is a major financial backer of key Beetaloo Basin LNG developers, and argues the project is not commercially viable.

What Jarden cannot find in FY25 or FY26 reporting is the earlier group-level pledge to align financing with the global goal of net zero by 2050. That commitment appears in the FY22 to FY24 reports, while FY25 instead frames its position as “supporting the energy transition”.

Meanwhile FY26 reports refer to “the goals of the Paris Agreement”. Macquarie states fossil fuels, “particularly natural gas, will be required for some time”.

MF highlights Macquarie has increased upstream oil & gas exposure while the Big Four banks have cut theirs. However, Macquarie remains behind ANZ Bank ((ANZ)) at $2.4bn in FY25 versus $3.6bn, albeit Macquarie’s exposure was up 167% versus FY22 while ANZ’s fell -49%, Jarden reports (although each bank defines exposure differently).

Macquarie “does not mandate client transition plans”, whereas ANZ, CommBank ((CBA)), National Bank ((NAB)) and Westpac ((WBC)) all require them of fossil fuel clients. MF notes Macquarie is the only major Australian bank with no exclusion on financing new oil & gas fields.

European peers go further, Jarden reports. For example: ING Bank stopped dedicated finance for new oil & gas fields in 2022, extending this in 2023 to midstream which includes new fields; BNP Paribas has ended finance for new oil fields and new gas capacity and is cutting upstream oil finance -80% by 2030; and Société Générale rules out finance for greenfield oil & gas fields, targeting an -80% cut in upstream exposure by 2030 against 2019. 

The Trump Tariff Paradox

The US is threatening to impose trade tariffs of up to 12.5% on 60 countries, including Australia, over their inaction on forced and slave labour worldwide.

Albanese’s response is that a new tariff on exports to the US is “unjustified”, as Australia has “robust, comprehensive and world-leading legislation addressing forced labour and modern slavery”.

One might be forgiven for viewing this new tariff as a Trump beat-up, following the Supreme Court’s ruling that the original Liberation Day tariffs, and their various iterations subsequently, are illegal.

Yet, as Jarden reports, The Australian government 2023 statutory review concluded the Modern Slavery Act (MSA) of 2018 had not caused meaningful change for people in conditions of modern slavery, and reform remains incomplete.

The government endorsed 25 of 30 of the review’s recommendations, outlined a phased approach and ran a consultation that closed in September last year, but to date nothing has been legislated.

In Jarden’s view, the new tariff measure (if passed) hits companies with direct US export revenue hardest.

However, the greater consequence is the direct financial incentive the tariff creates for Australia to legislate the MSA reform it has already conceded it needs, Jarden suggests.

Human Capital Management

Macquarie has updated its database of Human Capital Management (HCM) indicators which now covers a 19-year period for the ASX100, with coverage being extended to all companies under coverage since 2014.

Macquarie’s “dynamic leaders” portfolio, under a market-cap weighted scenario, has produced annual market outperformance of 0.5% pa since inception.

As well as being a lead indicator of management quality and long-term performance, Macquarie demonstrates there are clear financial and operational cost improvements in HCM.

Tied in with productivity is employee satisfaction.

Furthermore, managing absenteeism and staff turnover can provide a cost advantage over peers, as illustrated by Wesfarmers ((WES)) and National Bank. Based on Macquarie’s analysis, lower staff turnover for these companies equates to an estimated cost benefit of 4%-7% of employee wages expense.

Safety is an important facet to manage as incidents can trigger delays, shutdowns, and, ultimately, lower operating performance. In addition, safety incidents can affect executive remuneration, with safety on average 13% of large-cap resource companies’ short-term incentives.

Industrial disputes in 2025 were subdued, Macquarie notes, with 2026 year to date also at very low levels following an elevated 2024 based on number of employees involved in a dispute.

The companies with the highest HCM scores on Macquarie’s scale are AGL Energy ((AGL)), Brambles ((BXB)), Car Group ((CAR)), CommBank, Cochlear ((COH)), Goodman Group ((GMG)), JB Hi-Fi ((JBH)), Mirvac Group ((MGR)), Qantas Airways, ResMed ((RMD)), Telstra ((TLS)) and Wesfarmers.

The companies with the lowest scores are Baby Bunting ((BBN)), G8 Education ((GEM)), Helia ((HLI)), IGO Ltd ((IGO)), Lovisa Holdings ((LOV)), Mineral Resources ((MIN)), NRW Holdings ((NWH)) and SGH Ltd ((SGH)).

Late Addition: El Nino

Just received in the FNArena inbox: Morgan Stanley’s El Nino Risks Rising into 2026/27, a global, cross-sector assessment of how a potentially very strong El Nino could affect commodities, inflation, economies and individual companies.

The central message is that El Nino should be treated as a bottom-up investment theme rather than a broad macro trade.

El Nino has been confirmed, with an estimated 81% probability of a very strong event late in 2026. It is expected to peak between December and February before weakening during the March quarter of 2027.

Most effects on company earnings and inflation would therefore emerge during 2027.

Importantly, the report points out, a stronger El Nino does not automatically produce more severe consequences. The effect depends on where rainfall shifts occur and whether they coincide with critical planting, growing or harvesting periods.

A relatively weak 2002-03 event produced a more widespread Australian drought than the very strong 1997-98 event.

The main additional variable is the Indian Ocean Dipole. It remains neutral, but a positive IOD during the second half of 2026 could reinforce dry conditions across Australia and Southeast Asia and amplify the effects of El Nino

Morgan Stanley sees commodities as the earliest and most direct transmission channel. The report singles out sugar, cocoa and to a lesser degree grains.

Copper is identified as the most exposed metal. Flooding could interrupt Chilean mines and logistics, while drought could reduce hydroelectric power availability for Zambian production.

Coal and nickel appear relatively better supported.

Equity implications

Potential global beneficiaries include:

• Sugar and South American farming companies
• Fertiliser, seed and agricultural machinery providers
• Latin American electricity generators
• Large food retailers and discounters able to pass on inflation
• Companies supplying climate-resilience infrastructure

Australian implications

For Australia, Morgan Stanley expects below-average rainfall across important southern growing regions and above-average temperatures across most of the country.

The principal agricultural risks are weaker grain yields, reduced pasture conditions and lower dairy production, along with potential damage to wine-grape yields and quality.

ASX-listed exposures highlighted include Qube Holdings ((QUB)), a2 Milk ((A2M)), Bega Cheese ((BGA)) and Treasury Wine Estates ((TWE)).

Any energy consequences are mixed:

• A milder east-coast winter would reduce gas and electricity demand, creating headwinds for the likes of APA Group ((APA)) and Beach Energy ((BPT))
• A hotter summer in 2027 would increase electricity demand, benefiting AGL Energy ((AGL)) and Origin Energy ((ORG))
• Reduced cyclone activity could help Woodside Energy ((WDS)) and Santos ((STO)), as well as northern iron ore producers.
• Lower Queensland rainfall could support Whitehaven Coal’s ((WHC)) production and Aurizon Holdings’ ((AZJ)) coal-haulage volumes.
• Drier conditions could increase bushfire risks for utilities, energy companies and insurers.

Lower rainfall in populated areas could also support Transurban’s ((TCL)) traffic volumes and construction activity, although extreme heat may offset some of the benefit.

Longer-term theme

Morgan Stanley also identifies climate adaptation and resilience as a structural investment theme.

Relevant areas include cooling systems, electricity-grid modernisation, water management, resilient construction materials, agricultural biological products, early-warning technology and supply-chain diversification.

The report concludes companies with secure sourcing, diversified logistics and robust infrastructure should be better positioned to manage both climate and geopolitical disruptions.

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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