This article forms part of CAER’s ‘Responsible Investment Agenda 2018 – A Work Plan for Australian and New Zealand Investors’ Report
The transition away from fossil fuels to renewables is accelerating fast. In 2018, investors will need to buckle up, and we are not talking about Tesla’s Ludicrous Mode!
Companies faced with higher power prices and concerns over energy security, are turning to renewable energy and energy efficiency measures to provide greater certainty. Lower costs have dramatically improved payback periods, making such investments a no-brainer for management looking to reduce costs. Investments in renewable energy and energy efficiency measures also allow companies to reduce their carbon footprint and address risks and opportunities related to climate change.
The cost of renewables will continue to fall; however, it is the rise of batteries and the use of smart technology to create dispatchable renewables that will really have an impact on the economy. Tesla’s big lithium-ion battery in South Australia (officially known as the Hornsdale Power Reserve) is already changing the way the grid operates. Built in less than 100 days, the battery has a total generation capacity of 100 megawatts and 129 megawatt-hours of storage. Tesla now plans to build the world’s largest virtual power plant in Adelaide, linking household rooftop solar and battery storage to create 250 megawatts of solar energy and 650 megawatt hours of battery storage.
The Hornsdale power reserve, which was built by Tesla and is owned by Neoen[i] is only the start of renewable energy powered by modern large-scale battery technology. There are many more storage projects on the way in 2018.
Increased Reporting and Disclosures
The increased risks associated with climate change and greater stakeholder expectations require companies to improve their reporting on their exposure to climate-related risks, and how they plan to transition to a low carbon economy. Some companies will manage this transition better than others.
The TCFD sets out recommendations for disclosing clear, comparable and consistent information about the risks and opportunities presented by climate change. Companies adopting the TCFD recommendations are leading the way when it comes to reporting on the resilience of the organisation under different climate-related scenarios, including a 2°C or lower scenario.
A disconnect between Policy and Business
Australian governments energy and climate change policies over the past 10 years have been intermittent. This is likely to continue in 2018. Listed companies have highlighted government uncertainty on energy and climate policy as a leading risk, and have placed demands on government to produce clear policy measures.
Many businesses have already moved ahead of governments in Australia. Tesla’s big battery has demonstrated the reality of what the current technology is capable of. Government policy and regulators need to catch up. In New Zealand however, government policy is more certain, with the newly installed Labour government recently announcing plans to increase electricity generation from renewable sources from 85% to 100% by 2035.
The Impact on Investment
Investors need to be aware of the transition currently occurring in the energy market and how this will impact on their portfolios in 2018. Investors should be asking themselves what are the risks and opportunities from the transition to a low carbon economy and which sectors and companies are going to be most impacted.
Increased risks associated with climate change and greater stakeholder expectations means that investors should not only be measuring their portfolio’s carbon footprint, but also be looking to identify strategies to reduce the carbon footprint of their investments and the associated energy transition.
Of course, some companies will struggle with the transition. Shareholder engagement and advocacy will be an important factor in improving their performance. A number of climate change related shareholder resolutions are planned for 2018, and we can already see that responsible investors increasingly vote their shares in support of these.[ii]
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[i] Hornsdale Power Reserve website: <https://hornsdalepowerreserve.com.au/>AP/ABC, ‘Ardern aiming for 100 per cent renewable energy’, ABC News Website (24 October 2017): <http://www.abc.net.au/news/2017-10-24/new-zealand-jacinda-ardern-signs-coalition-deal-outlines-plans/9082140>
[ii] Ruth Williams, ‘Big investors backed shareholder campaign on climate, human rights’, The Sydney Morning Herald (23 February 2018): <https://www.smh.com.au/business/investments/big-investors-take-a-public-stand-on-climate-change-risk-20180215-p4z0gr.html>
Author: Phil Sloane
Executive Director, Research Services