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The Inside Investor

March 17, 2021

Thinking Forward - Investing in the decarbonisation trend


Ishan Dan

Decarbonisation could well be the word of 2021. Extensive change is underway, as both governments and the private sector seek to move towards a lower-carbon existence. This will have huge ramifications for our economy but at the same time it brings with it an opportunity for Australia to introduce new and cleaner technologies. Currently Australia has one of the highest carbon emissions per person in the world, and is therefore unlikely to receive any favourable treatment.

Carbon tariffs could be a powerful force towards faster global decarbonisation. The three largest carbon emitters, the US, EU and China, are all targeting “net zero emissions” by 2050. Japan, South Korea and the UK have also jumped on board. The goal is for the world to hit net zero by 2050, thus, according to the Paris Agreement, help to achieve the goal of limiting global warming to as close to 1.5 degrees Celsius as possible. Whether you are convinced or not about this, businesses clearly see the benefit in lower carbon emissions, with new technologies ultimately leading to lower costs and higher profits.

What does this mean?

Decarbonisation will likely mean the eventual decline of Australia’s fossil fuel industries. There’s no other way to say it. Even though most of our coal and gas is exported overseas, then used domestically, our Asian customers have set net zero targets and will stop burning fossil fuels eventually. Even though it seems like a sad story, Australia has a lot more to lose than other countries considering its vast natural resources that support our agricultural and tourism industries. Decarbonisation is a good news story. And what’s more, it gives our economy an opportunity to flourish in a renewable energy-driven economy.

The election of Joe Biden as US President has been a key driver of recent interest, with a clear green agenda and a push for companies to respond to policy stimulus by cutting their environmental footprint. But the sector isn’t an easy one to navigate: it includes big businesses and small, along with all types of technologies and Australia is only a small part of the opportunity set. We have identified two leading Australian investors that have a strong commitment to investing in a lower-carbon future: Australian Ethical and Munro Partners.

Australian Ethical

The team at Australian Ethical are all about investing ethically. Ethical and sustainable investing is everything they do. They’ve been doing it since 1986 and have have always stayed true to this. The company now manages $5.05 billion for over 62,000 customers as at 31 December 2020. Their ethical approach involves the use of negatives screens to omit funding harmful things like tobacco, uranium or coal mining, exploitation of people or old growth forest logging. The team then outlay a positive screen to invest in companies can help build a new low-carbon economy, fund medical breakthroughs, technology breakthroughs, efficient transport and more. The fund has returned 24.53 per cent over the last year. Top five share holdings are Macquarie Telecom Group LTD, Healius, Bank of Queensland, Cochlear, and Bendigo & Adelaide Bank.

Climate Action

Australian Ethical avoids climate-unfriendly sectors like fossil fuels, and targets investment in climate-friendly sectors. The team goes further, trying to decarbonise its entire investment portfolio while advocating for business action and better climate policy. And by reducing and offsetting its own operational emissions, the team won a global award for transparency about the alignment with its climate goals. Australian Ethical has measured and reported the carbon footprint of its share investments and tested the power generation investments against International Energy Agency (IEA) emissions reduction scenarios. It is a huge step for a fund manager to verify and measure its progress towards a net-zero-emissions target.

Australian Ethical has a focus on investing in renewable energy (solar, wind, tidal, geothermal and sustainable hydro), as well as energy efficiency and battery storage. The team says “these technologies are essential to limit global warming; and not only are they more sustainable than fossil-fuel energy production, they also are job creators and can help alleviate poverty with off-grid and future-proof energy supply.” As well as energy creation, AE is also investing in companies whose products and services reduce energy demand, such as LED lights, insulation, recycling and smart energy management technology. The efficient use of energy is important because it reduces energy waste: an avoided watt needs no resource at all to be produced. Recent grants supported a solar system at a wildlife rescue centre in Victoria and a technician in East Timor repairing solar panels.

Australian Ethical’s carbon footprint target is net-zero-emissions. Its share portfolio is 70 per cent less carbon-intensive than the benchmark. Here are a few of the positive impacts Australian Ethical have achieved:

  • 70% per cent less CO2 produced than benchmark
  • Nil investments in fossil fuel companies
  • Nil investments in nuclear companies
  • 6 times more investments in renewable power generation than the global share market

Munro Partners

Nick Griffin’s Global Growth Fund aims to provide investors with meaningful, risk-adjusted, absolute returns through exposure to global growth equities over the medium to long term, while maintaining a capital preservation mindset. Griffin focuses on growth by identifying sustainable growth trends that are under-appreciated, not well understood and mispriced by the market.

In its recent quarterly report, Munro Partners said one of its key “areas of interest” in 2021 and beyond was into a “climate change” thematic. It specifically targets investment in renewables and electric-vehicle original equipment manufacturers (OEMs) and suppliers. Key holdings focused on this thematic include Orsted and Vestas Wind Systems: Danish multinational power company, Orsted, is the largest offshore wind  developer globally, while Vestas, also listed in Denmark, is the leading onshore wind turbine manufacturer globally.

Munro Partners chief investment officer Nick Griffin said he expects US$21 trillion ($26.8 trillion) in capital to shift from old carbon-intensive industries to “green” technologies over the next 30 years. This is a massive opportunity for investors and represents significant upside potential. More than 18 per cent of Munro’s portfolio invested in what it terms ‘climate change companies.’ It also owns Orsted, and Vestas, which make up US$150 billion ($192 billion) in market cap – larger than our biggest company in Australia.

US President Joe Biden’s aggressive US$21 trillion ($26.9 trillion) climate change plan to get the US to completely clean electricity by 2035 and to net-zero emissions economy-wide by 2050 is the driving force behind the climate-change investment engine. Decarbonisation is happening and with it comes a wave of new opportunities for growth.

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