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Renewables power to new highs

The trend towards renewables with a greater focus on ESG and the carbon footprint of stocks has only just begun

Wednesday, December 23rd 2020, 6:30AM 1 Comment

by Pathfinder Asset Management

A sector which has experienced an amazing boost of late is clean energy, as it is expected to be a major beneficiary of Biden Administration policy.

At Pathfinder, a key overweight investment theme across our funds is renewable energy, with most of our solar and wind power holdings in the US and Europe riding recent outperformance.

Closer to home, two of our renewable energy positions have hit new all-time highs this month – Meridian Energy (MEL) and Infratil (IFT).

Meridian, which is a 100% renewable power generator, has rallied close to 40% over the past six months. Meridian is a great case study illustrating our active management approach for NZX stock selection.

We backed Meridian as our top pick in the electricity sector this year as we believed that the uncertainty and negative impact around a Tiwai Point closure was overplayed.

Since November, the rally has been supported by inflows into clean energy ETF funds as well – don’t fight passive fund flows.

Meridian bats well above its global weight as a top holding in the iShares Global Clean Energy ETF, a US$3.8 billion exchange traded fund which has surged +125% in 2020 so far.

The global wave of ESG money is starting to get serious about climate change. The circa US$30 trillion ESG community is at an early stage of a necessary shift from basic negative screening (such as excluding coal and fossil fuels) to a more scientific approach of combating climate change where alignment with Paris commitments is taking centre stage.

Australasian investors are no exception to this global trend. According to a major broker report, more than four out of five Australasian asset managers state they either already are, or are considering, setting a net zero emissions target for 2050.  The shift in focus is being facilitated by a combination of increased disclosure on total scope emissions and detailed climate modelling.

Over the last five years, the traditional carbon-based energy sector has diminished from 6% to 2% of the S&P 500 index. In New Zealand, valuations of Mercury and Meridian (who pride themselves on 100% renewable energy generation) have decoupled from that of peers Contact and Genesis, and are currently valued at a 60%+ premium, versus no premium five years ago.

New Zealad-based Infratil, which we own across several of our funds, received a takeover offer last week from Australia's largest Super Fund at over a 20% premium to its last trade price.

The news wasn’t surprising as Infratil's assets are premium, largely green, growth infrastructure assets which are currently one of the most sought-after asset classes on the globe, meaning they can demand eye watering valuations.

In summary, we are confident the trend towards renewables with a greater focus on ESG and the carbon footprint of stocks has only just begun. Having an over-weight towards the sector has paid dividends in recent times and ESG considerations are becoming a real risk factor to consider when investing in stock markets.

Pathfinder is an independent boutique fund manager based in Auckland. We value transparency, social responsibility and aligning interests with our investors. We are also advocates of reducing the complexity of investment products for NZ investors.

Tags: Pathfinder

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Comments from our readers

On 12 April 2021 at 9:42 am Waiau Rivercare said:
Good morning
The Waiau Rivercare Group Inc (WRC) is an environmental organisation in NZ concerned with protecting the well being of the Waiau River in Southland and well being of the communities the River sustains.

Meridian Energy Ltd owns and operates the Manapōuri Power Scheme, which diverts upto 95% of the waters which once flowed down our River, and uses those waters as fuel for its Manapōuri Power Station. The spent water is discharged to Doubtful Sound and never returns to the Waiau.

The Power Scheme is extractive, consuming 60+% of NZ's total fresh water, and is NZ's greatest polluter in that it discharges 16.7 cubic kilometres per annum of freshwater into a previously pristine saline environment of Doubtful Sound, deep in the Te Waipounamu UNESCO World Heritage Site..

The diversion of the Waiau water has had massive and continuing negative impacts on the ecology of the Waiau. Those impacts have materially degraded water quality of what was once NZ's second-largest river.

The WRG is interested therefore in any suggestion that MEL is either clean or green and that it desrves a low (good) ESG risk rating. It appears your article has focused soley on the outputs of renewable energy and ignored the continuing adverse environmental impacts of its production.

Paul Marshall
Co Chair

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