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The Ethical Investor: What the Big Oil rebound means for ESG; and Australian Ethical’s Mike Murray on new ESG ETF
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The Ethical Investor is Stockhead’s weekly look at ESG moves on the ASX. This week’s special guest is Mike Murray, portfolio manager and Head of Domestic Equities at ASX-listed Australian Ethical Investment (ASX:AEF).
With oil prices at eight-year highs and inching towards the US$100 level, fossil fuel stocks are suddenly back in vogue.
After a year of humiliating losses in 2020, major players ExxonMobil and Chevron reported a combined profit of $54 billion this week.
It was the best profit result for both companies since 2014, the year that oil last traded above US$100 a barrel.
Shell also just announced its best quarterly results in eight years today, with a full year profit of $19.3bn.
All three stocks have risen well over 50% in the last 12 months.
Have ESG investors ditched the renewable theme in favour of oil stocks?
Not quite, according to analysts, as the current situation is just a temporary culmination of unforeseeable events coming together at the same time.
A freezing northern hemisphere winter, a Gulf of Mexico hurricane, and a flashpoint in Ukraine are all unexpected triggers that have driven the recent surge in oil price.
ESG experts believe the renewable energy thesis is still intact for the next decade, and it’s Big Oil themselves that will have to continually walk the tightrope to please evermore demanding shareholders.
As an example, Shell stunned the world last week with a major discovery at its offshore Graff-1 well in Namibia. But it wasn’t Shell that first reported the find, it was Reuters.
Exxon also continues to find major discoveries in Guyana, but it was their 2050 carbon goals they preferred to dangle in front of shareholders.
“You have to be a real specialist sector watcher to know these kinds of things because they don’t talk about it,” Andrew Latham, vice-president for exploration at Wood Mackenzie told FT.
Experts have however warned that overly aggressive ESG shareholder activism could result in a self-fulfilling prophecy that could ironically push oil prices and oil profits even higher.
“Whatever the morals of fossil fuels, most investors invest not because it’s the moral thing to do, but because they want to make money,” says oil expert Irina Slav.
“A current imbalance between supply and demand in the most used commodity in the world is certainly a context a pragmatic investor would want to be part of.”
“Those who don’t will effectively contribute to even higher oil prices,” she concluded.
ESG interview with Mike Murray, Head of Domestic Equities at ASX-listed Australian Ethical Investment
Responsible investment and super fund manager Australian Ethical has launched its first ever ETF to give expanded access to all Australian investors.
The “High Conviction Fund ETF” (ticker: AEAE) is an actively managed portfolio of 20 to 35 companies, primarily drawn from the ASX 300.
The portfolio aims to to meet extensive ethical criteria for investment based on Australian Ethical’s rigorous Ethical Charter.
The AEAE ETF was listed on Cboe Australia (formerly Chi-X) on Tuesday, 1 February.
Mike Murray, who has over 20 years of experience working in ESG and ethical oriented funds, manages the AEAE ETF.
Please tell us more about the High Conviction ETF
“Australian Ethical currently manages three active funds investing in Australian shares. The first one is our all-cap fund, and the second is our emerging companies portfolio which is our small cap fund.
“In October last year, we launched the High Conviction fund, and it predominantly invests in the ASX 300.
“The fund targets slightly larger companies than the other strategies, and is a bit more concentrated. It typically holds about 30 stocks, where those other strategies might hold 60 or more stocks.
“We’ve now just launched it on the Cboe exchange and made it accessible via an ETF; basically giving investors another platform to access that High Conviction fund.
“And the main message here is about making ethical investments more more accessible broadly, which is something we’ve been trying to do with Australian Ethical for a long time.”
What’s the fund’s take on fossil fuels?
“Our portfolios exclude companies like Woodside, Whitehaven, Santos, Origin and AGL, because of their fossil fuel revenue.
“We do however invest in other renewable energy companies like Contact Energy (ASX:CEN).
“Contact Energy is investible for us. Although it has some revenue from gas, it meets our thresholds as it generates 80% of electricity from renewables.”
What are some of the other stocks invested in the High Conviction Fund ETF right now?
“We like Bank of Queensland (ASX:BOQ).
“We think BOQ is positively exposed to rising interest rates. While there is currently intense mortgage competition we expect this to lessen with time and that they will also benefit from increased scale with the ME Bank acquisition. The stock trades at a discount to book value with an attractive dividend yield.
“Ramsay Healthcare (ASX:RHC) and G8 Education (ASX: GEM) represent attractive COVID reopening plays, and are domestic leaders in hospitals and childcare respectively. Both companies are well capitalised following equity raisings.
“Healius (ASX:HLS) is a current beneficiary of COVID related demand for pathology which will decline through time, but its underlying business is very robust and it has a strong balance sheet.
“We think global industry leaders such as Cochlear (ASX:COH), Brambles (ASX:BXB), and Blackmores (ASX:BKL) are strong franchises available at attractive valuations, with robust growth opportunities.
“Renewables and recyclables such as Contact Energy offers a highly defensive and predominantly renewable cashflow stream.
“Sims Group (ASX:SGM) meanwhile will benefit from increased demand in steelmaking for lower carbon raw materials such as scrap.
“We also think telcos like Telstra (ASX:TLS) and Pexa (ASX:PXA) appear attractively valued relatively to other defensive names, and offer the opportunity to buy key strategic assets with some infrastructure like qualities and pricing power.”
ESG news in Australia and the ASX this week
As reported by Stockheader Jessica Cummins, Twiggy Forrest’s green leg Fortescue Future Industries (FFI) has snapped up an interest in Sparc Technologies’ new joint venture Sparc Hydrogen.
Sparc Hydrogen is researching technology which would see green hydrogen produced by only sunlight and water (photocatalytic water splitting coupled with solar radiation), instead of renewable energy and electrolysis.
It has an exclusive licence to develop and commercialise this green tech which was created by the University of Adelaide and Flinders University.
The initial research project will look to develop a process known as Thermo-Photocatalysis, which employs the sun’s radiation and thermal properties to convert water into hydrogen and oxygen.
Lithium Australia has agreed on indicative terms for its acquisition of the final 10% of Envirostream Australia, held by Envirostream managing director Andrew Mackenzie.
LIT currently holds a 90% interest in the company, however negotiations have been made at an advanced stage and a purchase price of $250,000 contemplated for the remaining stake.
Hydrogen transport proves viable
There have been some very valid concerns raised about the production process, but if the Hydrogen Energy Supply Chain (HESC) Pilot Project has proved anything, it is that transporting hydrogen over long distances is feasible.
The Suiso Frontier vessel has left Australian shores and is making its way to Kobe, Japan where the team will unload the liquified hydrogen into another purpose-built storage tank onshore.
While it marked a significant moment for the HESC project, it also marked a significant moment for the world’s hydrogen industry, with the first fully integrated hydrogen energy supply chain realised.
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