Society’s values on energy production have changed drastically in the last hundred years. Burning fossil fuels has allowed companies, countries and empires to prosper and create booming global economies. However, through an increased understanding of environmental and health impacts, and changes in technology and societal values, people are today looking for cleaner, environmentally friendly and socially responsible ways of generating energy. As well as this, investment into this area has boomed due to the feasibility of the projects and their way of generating not only green energy but financial returns.
The shift in energy production can be attributable to a range of factors. In recent years, the cost of producing power from gas has significantly increased the wholesale price of power, however, the growth in renewable energy has seen prices fall overall by an average of 7.1% between 2019–20 and 2021–22. Climate and health issues have also been a major concern for consumers and investors, as societal values have transitioned. It is proven that the burning of fossil fuels pollutes the air and negatively affects humanity's health, with WHO stating 91% of the world’s population breathes air that exceeds guideline limits in terms of levels of pollutants. With this in mind, Investors now want to allocate capital to gain both financial ROI and social ROI. Examples include Atlassian founder Mike Cannon-Brookes backing the large-scale renewable project called Sun Cable and high-profile Fortescue boss Andrew ‘Twiggy’ Forrest’s dual support for green steel and Sun Cable also.
Unbeknownst to some, these more efficient and ethical technologies are also producing greater investment returns for shareholders than traditional global energy companies. A June 2020 report by the Imperial College of London Business School and the International Energy Agency explored risk and return for renewable energy companies in the US, UK and Europe and found that listed renewable energy portfolios have outperformed fossil fuel portfolios over the last decade and were less volatile. Importantly the report found that the performance of renewable energy portfolios has significantly improved over the last five years while volatility has decreased.
While this past performance is encouraging, investment is about the future. In this regard, the Inevitable Policy Response Report paints a picture of a potentially disruptive transition from fossil to renewable energy, as countries seek to catch up for lost time and climate impacts worsen. Their scenario sees coal phased out by 2040 and two thirds of all electricity generated by wind and solar by 2050. These timescales matter given new energy infrastructure assets must operate for decades to deliver expected rates of return.
Another related and important transition is to electric vehicles, which outside of Australia has shown significant growth with leading car manufacturers committing to 100% battery powered product ranges and phase out plans for internal combustion engine (ICE) vehicles in countries like the Netherlands, Denmark, France and Ireland. This is in part because the European Union CO2 targets for 2021 require EV and hybrid vehicle volumes to double. The combination of renewable energy, which has already become cheaper than fossil fuels in most countries, and electric vehicles, which are expected to be competitive with internal combustion engines in the next few years, point to the twin disruptions of transport and energy that could result in significant pain for shareholders facing stranded fossil fuel assets and underfunded remediation liabilities.
A broader cleantech shift means that renewable energy and transport are not the only areas for opportunity when it comes to the transition to a low carbon economy. The Deloitte Australia CleanTech Index (DACT) comprises 90 companies listed on the Australia Securities Exchange which are included in sub-indexes involved with clean technologies ranging from waste and water to smart grids and green buildings. While many are smaller companies that can carry higher risk, the index achieved a 31.8% gain in the year to February 2021 outperforming the ASX 200 which was 1.5% lower. This was the seventh consecutive year the index has outperformed the market. Over five years the index has delivered a 117.1% gain vs a 32.2% gain for the market. This positive performance reflects the significant growth by CleanTech, however, like any investment, there are risks and not all companies in any sector will be good investments. Investor due diligence is always important.
As Australia is one of the world’s biggest exporters of coal and gas, our economy and the share price returns of fossil fuel companies face significant risks. A green and prosperous future will require a substitute for the loss in export revenue. Sun Cable aims to become the first exporter of green energy, utilising solar energy in Australia to be exported by submarine cable to the Indo-Pacific region. As cleantech and renewable energy companies mature, there is a risk of flight if Australia does not have a supportive environment for their growth. It is important for all Australian shareholders, including millions of Australians through their superannuation funds, that these opportunities are available domestically.
As we start 2021, it is a good time for all shareholders to assess their portfolios’ exposure to the great shifts and trends which will shape global economies in the years ahead. Many may be left uncomfortable by what they find.
Leo Armati is a volunteer research contributor at Altiorem and is currently in his penultimate year studying a Bachelor of Business majoring in Finance and Economics. Leo’s passionate and motivated by the growing progression in both the technological and financial sectors. In particular, renewable energy, financial sustainability and ethical investing are important areas with growth potential.
Pablo Berrutti is Altiorem’s founder, he has deep investment and financial services experience including responsible investment, risk management, marketing, communications and strategy. He is currently a senior investment specialist for Stewart Investors Sustainable Funds Group and was formally the Head of Responsible Investment, Asia Pacific for Australia’s second largest fund manager.