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Specialist in Asia Pacific, Japan, China, India and South East Asia and Global Emerging Market equities.

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Stewart Investors manage investment portfolios on behalf of our clients over the long term and have held shares in some companies for over 20 years. They launched their first investment strategy in 1988.

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Leader in systematic equities across market cap weighted indices, smart beta and active quantitative strategies

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Climate change action in the spotlight

During 2020, we witnessed a renewed and often urgent focus on climate change action by a range of stakeholders. The scale of the devastating Australian bushfires in late 2019/early 2020 brought climate change even more to the fore in this region. It was swiftly followed by the pandemic, and prompted many people to demand more urgent action around climate change.

The pandemic was a stark reminder that nature can wreak havoc on our lives and economies, regardless of humans’ best efforts to stay in control.

In terms of climate action, environmental non-government organisations (NGOs) have increased their sophistication and coordination globally. Their influence and credibility has grown as the impacts from a changing climate have become clearer, particularly following the Paris Climate Change Agreement.

At the same time, the diversity and reach of the growing civil society movement have sharpened SLO risks faced by companies, investors and financiers who fail to take action on emissions reduction. There is now a broad expectation that companies will act to reduce their carbon footprint, and both social and mainstream media are willing to loudly critique perceived inaction.

This activism has continued to target companies and investors during the pandemic. For example, at the Woodside Petroleum AGM in April 2020 there was a record breaking level of support for a shareholder resolution for the company to set targets for Scope 3 emissions and extensive media coverage following the meeting1. Meanwhile, a 25-year-old Brisbane man sued a large superannuation fund for its perceived failure to manage climate change risk. The fund was prompted to make a range of commitments, including to reach net-zero greenhouse gas emissions for the scheme’s investments by 2050.

In Europe, the economic turmoil wrought by COVID-19 has made conversations around a green recovery even more important. Attention has turned to The European Green Deal, which is an action plan for the EU to be climate neutral in 2050, by boosting the efficient use of resources, moving to a clean, circular economy; restoring biodiversity and cutting pollution. It seeks to achieve this by:

– investing in environmentally-friendly technologies

– supporting industry to innovate

– rolling out cleaner, cheaper and healthier forms of private and public transport

– decarbonising the energy sector

– ensuring buildings are more energy efficient

– working with international partners to improve global environmental standards

As the final point suggests, this will likely spur other countries into action as well. With US President-Elect Joe Biden’s plan to re-join the Paris Agreement, the stage is set for renewed vigour on climate action across the globe. In Australia, the CEOs of 22 of the country’s biggest companies, including BHP, Commonwealth Bank of Australia, AGL, Rio Tinto and Wesfarmers, have launched a coalition to reduce emissions in line with the Paris Agreement. The Climate Leaders Coalition will begin as an information sharing project, with hopes that it will eventually lead to ambitious projects in renewable energy, low-carbon technology, green finance and carbon investment2

Institutional investors are not waiting for government action on emissions, especially in Australia where Federal Government policy lacks certainty. Over the course of the year, a number of Australian superannuation funds have followed the path of their counterparts in Europe and moved to set portfolio wide net zero emissions targets. These targets have been accompanied by a roadmap for implementation utilising a variety of tools including divestment, engagement and voting.

Aware Super, for example, rapidly cut the carbon footprint of its equities holdings by 40 per cent in October 2020, after passively excluding the highest-emitting companies on global sharemarket indices, including the ASX2003. Described as ‘automated mass divestment’, this move by the AU$120 billion fund demonstrates that large investors are making significant investment decisions based on companies’ carbon footprints. This is unsurprising given the number who have committed to the long-term goal of net zero emissions by 2050.

In the UK, the Brunel Pension Partnership, representing 10 regional pension funds from the south west of England, outlined a new five-point plan to align its investment portfolio with a zero-carbon future.

Over the years 2020-22, Brunel will demand that all material holdings within the funds take steps to align emissions reductions with the needs of the Paris Agreement, while simultaneously improving management and disclosure practices in relation to climate-related risks. Brunel has warned that organisations and investment managers that fail to demonstrate reduced exposure to climate risks could be voted against during board member re-appointments or removed from Brunel’s portfolio altogether when a review occurs in 2022.

The new Brunel strategy, is in part designed to overcome industry challenges the scheme perceives as problematic, including an emphasis on short-term performances over long-term potential and “backwards-looking investment risks models” that fail to take future climate risks into account.

As climate action ramps up all over the world amongst companies, investors and community groups, there will be even more focus on identifying and mitigating the risks of other potential, high-impact global events triggered by a changing climate.

Managing the risks of climate change has long been a focus in our own portfolios, and will continue to be prioritised at a portfolio and corporate level. We are investing in better tools to help our investment teams, Global Investment Committee and boards further understand and manage climate-related risks and opportunities. Over the course of the coming year we intend to work with various parts of the business including our Climate Change Working Group to implement these tools. As a result of this work we expect to release more comprehensive climate change disclosure, to complement the Task Force on Climate-related Financial Disclosures aligned disclosure we released in 2017.

Lockdowns changed the energy market 

The lockdowns implemented in response to the COVID-19 outbreak dramatically curtailed electricity use and industrial production in most countries, pushing down global coal consumption. International Energy Agency (IEA) data below reflects this trend.

Source: IEA, https://www.iea.org/data-and-statistics/charts/annual-change-in-coal-demand-1971-2020, 30 April 2020

The reduction in demand squeezed high-cost-to-serve technologies out of the market, evidenced by the 20% reduction in demand for coal-generated electricity in the US. Conversely, as renewables capacity was added, demand for renewable energy is estimated to have increased by 15% during 20204. Given the competitive costs of renewable power generation when compared to coal and nuclear, we anticipate that renewable energy will continue to take market share, and this will only be accelerated if a Biden administration puts a Federal price on carbon.

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1. https://www.smh.com.au/business/companies/breakthroughmoment-woodside-investors-revolt-on-climate-change-20200429-p54oe8.html

2. https://www.climateleaders.org.au/

3. https://aware.com.au/blog/divesting-from-thermal-coal

4. EIA, October 2020

 

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