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How ESG funds have been impacted by energy price rises

The Russian invasion of Ukraine has highlighted how important the world' s energy dependency is, but ESG fund managers say it will also narrow the focus on the transition to renewable energy.
The Russian invasion of Ukraine has highlighted how important the world' s energy dependency is, but ESG fund managers say it will also narrow the focus on the transition to renewable energy.

The Russian invasion of Ukraine has highlighted how important the world’ s energy dependency is, but ESG fund managers say it will also narrow the focus on the transition to renewable energy. Energy prices were already increasing with inflation going into 2022 but the war has accelerated the effect as Europe and other regions looked to import gas and electricity from outside Russia . In the UK alone, a market reliant on Russian imports for only 5% of its gas, wholesale electricity prices have risen around 375% from £100/MWh to £475/MWh in the last six months, according to Mirabaud research. While this will continue to have implications for households, especially in the short-term, fund managers running sustainable portfolios said this is an opportunity for governments and companies to address their energy efficiency and step up their transitions to renewables. As a result, they have made a number of changes to portfolios in recent months and are cautiously optimistic about a greener future in the energy space. Tim Marshall, manager of the Invesco Sustainable UK Companies Fund How have the rising energy prices impacted your portfolio? We don’ t own oil and gas companies but there has been some impact of the higher oil price in exposure to utilities. We hold SSE but the higher power prices should be positive for the business as they have a renewable certificate for its onshore wind operations. Companies that are inflation-linked have also been impacted so water utlilites such as Severn Trent and United – but they are able to put prices up with inflation and their borrowing isn’ t in line with inflation so they should benefit from that. Another area of impact is those that are heavy energy users, such as Smurfit Kappa. It is a cardboard manufacturer so is healing the world in switching from plastic packaging to carboard which is much more sustainable, but it does use a lot f energy. Have you added to renewable energy positions? We have added a little to SSE, it was a big position already that hadn’ t moved much so we felt the market hadn’ t fully priced in the implications of the higher energy prices. There has been some concern the UK government will inflict a windfall tax, but our hope is that wouldn’ t the case. The company will benefit from short-term price increases and in the long term as European companies wean themselves off Russian gas. We also bought the power station Drax. It used to be a coal power station but transitioned to burn biomass instead, which is a central part of the government’ s renewable energy plan. How has rising energy prices affected the trajectory towards net zero? The transition to net zero is actually much more important than it was before, not just to reduce the amount of carbon in the atmosphere but also because of energy security. There have been a couple of massive policy changes on the back of the Ukraine war – Germany reversed its stance on defence spending and doubled its budget, and there have been other energy policies. Europe will be accelerating its move towards renewables and we have seen some evidence of that in offshore wind. There was a lot of bureaucracy to get through the winning of the sea bed to place an actual wind farm, the process could take years. But we have seen more supportive policies around that and we could see the benefits come through in the short term. Deirdre Cooper, co-head of thematic equities and co-portfolio manager of the Ninety One Global Environment Fund How have the rising energy prices impacted your portfolio? Thinking specifically about the renewable energy part of our portfolio, higher energy prices broadly means more headroom. In many places in Europe at the moment new-build renewables will come in at a fraction of the cost of current spot power prices, even after recent increases in raw material costs like steel. However, when people discuss investing in decarbonisation, they often forget the broader range of companies required to reduce global emissions, encompassing businesses in sectors as diverse as chemicals, software, semi-conductors, logistics and waste management. Like all companies with global supply chains, rising energy prices have had impact on the costs of some of our companies. For those companies focused on renewable companies, they have brought investor attention to issues such as the need to maintain long term energy security while pursuing decarbonisation goals. Have you added to or reduced exposure to any transitioning energy stocks recently? We do not invest in transitioning energy companies. We have however been long-term owners of companies such as Nextera Energy and Iberdrola, where their generation mix is much cleaner than the global electricity grid and as a result they have a positive carbon externality. Have you added to renewable energy positions? Over 2022 so far, we have added a new position in Sungrow, one of the world’ s largest solar inverter manufacturers, at an attractive entry price after the broader sector came under pressure in January. We see the Russian invasion of Ukraine as a seismic event for energy policy in Europe. Sadly, in the short term it means carbon emissions will increase significantly as Europe plans to almost eliminate Russian gas usage in the next couple of years. However, that means that Europe will redouble its efforts to build out renewable energy to replace that coal, and we see a similar trend across other European countries and also in Asia. All of which is supportive for our renewable energy exposure and new positions like Sungrow. David Harrison, fund manager of the Rathbone Global Sustainability Fund How have the rising energy prices impacted your portfolio? Rising energy prices (and other input costs such as logistics and metals ) is something that all our companies are thinking about. We are generally seeing our companies being able to adapt to the rising input cost environment. If high energy prices persist in the medium term, pricing power will become even more critical. Our renewable energy businesses have benefited from the current situation, as there is a general recognition that we will have to accelerate investment in this space. Have you added to renewable energy positions? We have gradually added to our exposure in several names. Alfen,which is the Dutch listed provider of energy storage technology and electric vehicle charging infrastructure, EDP Renováveis, the Portuguese listed renewable energy provider and Hannon Armstrong, the US listed provider of clean energy solutions. In each case the businesses are well placed to benefit from incremental investment in new technology and clean energy capacity. How has rising energy prices affected the trajectory towards net zero? This is an excellent question and we do not know the answer yet. Much of it will be dependent on policy decisions and how countries have re-appraised their long-term energy policies. Although we see accelerated investment in renewable energy sources, there is likely incremental spend on fossil fuel energy sources – particularly as governments promote energy security. Martin Todd, Sustainable Global Equity Fund lead portfolio manager at Federated Hermes How have the rising energy prices impacted your portfolio? We own businesses that are less exposed to high energy costs and we also own companies whose products enable better energy efficiency, from technology enablers through to industrial hardware. In an environment with prolonged high energy prices, these companies will see increased demand, and their less efficient peers risk going out of business. Have you added to renewable energy positions? We added to our holdings in Sunnova and Vestas. Sunnova provide solar energy solutions to US residential customers, there is a huge growth pipeline over multiple years, at an attractive valuation. Vestas is a supplier of wind turbines, and has been negatively affected by supply chain disruption and cost inflation. We added to the stock on weakness as we see structural long-term growth more than offsetting these temporary headwinds. How has rising energy prices affected the trajectory towards net zero? We don’ t know how long this spike in energy prices will last. The longer it goes on, the higher the return on new fossil fuel exploration. On the other hand, we will likely see demand destruction as buyers balk at higher prices. We are already seeing governments increase renewable energy capacity, while nuclear energy plans are being dusted-down and could become a key stepping stone towards net zero. Duncan Goodwin, fund manager of the Premier Miton Global Sustainable Growth Fund How have the rising energy prices impacted your portfolio? Generally, rising energy prices have been positive for share prices of companies in the portfolio. Specifically, renewable energy stocks have performed well, both in terms of current technologies such as wind and solar but also future technologies such as fuel cells and carbon capture. In addition, companies that can deliver improved efficiency in power usage – such as building energy efficiency – have also performed well. Have you added to renewable energy positions? We have been adding to companies that are exposed to the themes highlighted above. Currently, just over 15% of the Premier Miton Global Sustainable Growth Fund has direct exposure to the theme of ‘energy transition’ as we define it. We have additional exposure outside of the theme to companies exposed to related sectors such as building efficiency. How have rising energy prices affected the trajectory towards net zero? The current crisis makes the case for sustainable investing, and in particular renewable energy, both stronger and more immediate. With rising inflation – energy , labour or otherwise – there will come to be a renewed focus on increasing efficiency. The drive to get more output for less resource input is only going to accelerate on an individual as well as industry and company level. This objective is central to many sustainable investments. The strategic needs of a sovereign state have never been more aligned with the green agenda. Richard Lum, co-CIO Victory Hill Capital Advisors, and adviser to VH Global Sustainable Energy Opportunities How have rising energy prices impacted investor appetite towards renewables? More astute investors understand that the need for investment to create a sustainable energy system is more all-encompassing and pressing than the need to purely invest in renewable technology in order to obviate the need for conventional fossil fuel energy. In particular, there is a key need for renewable technologies to overcome their intermittency issues (such as longer duration storage projects and enabling biomethane to be used in a negative zero context) to allow for dependable power on the grid. Is increased interest in renewables infrastructure making it hard to find attractive deals? There is no shortage of renewable products coming to the market seeking ever-cheaper sources of capital, and this has attracted inflows from large institutional investors seeking risk-adjusted yields over the long term as a proxy for bond yields. However, the energy transition to net zero, and energy sustainability is a global phenomenon and not simply a western European one as perceived by many first-world investors. To make a true impact in the global sustainable energy agenda, requires investment in renewables and conventional energy infrastructure in developing as well as developed economies. How have rising energy prices affected the trajectory towards net zero? Rising energy prices driven by the current uncertainty around Russian sources of energy will inevitably precipitate a greater focus on ensuring the overall resilience and security of supply in the UK and Western European energy grids. In particular, this will dovetail substantially with the transition to net zero , and as such the shift will incorporate movements to alternative sources of transition fuels (ie natural gas from other supply sources in particular) as well as renewable power generation. Anu Narula, head of global equities at Mirabaud Asset Management How have the rising energy prices impacted your portfolio? Rising energy prices have proved a challenge to relative performance for our sustainable global equities approach as we have little to no exposure to the energy space. Sectoral market leadership year to date has centred around energy and financials so this has been a sector headwind for our investment approach. Have you added to renewable energy positions? We are invested in EDP SA in our Sustainable Global High Dividend Fund, a Portuguese electricity business operating primarily in Portugal, Spain and Brazil. 84% of their sales are from electricity generation and transmission (sourced 74% from renewables.) The other 16% of sales are from the development and management of renewables assets such as wind, hydro and solar. What is your outlook for renewable stocks over the longer term? We are positive on renewable stocks in both the mid and long term. The rise in wholesale electricity prices will lead to an acceleration in the transition to a low carbon economy across Europe and globally, and accelerate policy support, corporate capital investment and consumer adoption in areas such as solar in the near term and wind in the medium term. Edward Kevis, portfolio manager, Aviva Investors Have you added to or reduced exposure to any transitioning energy stocks recently? We view transition stocks as those companies positioning for a warmer low-carbon world due to the impact of climate change, as opposed to those consuming fossil fuels now but that might be producing renewable energy in the future. In our Climate Transition European Equity fund, we have been adding to holdings in the likes of Munich Re, L’ Oreal and Ashtead. These are names that have recently seen weak share price reactions, but fundamental business performance remains robust and they have clear strategies in place to manage the risks posed by climate change. Have you added to renewable energy positions? We added to our holding in EDP Renovaveis, which sits in the solutions sleeve of our fund. EDPR is well-regarded as one of the renewable leaders worldwide, with a geographically diverse portfolio, a rapidly growing pipeline and, thus far, strong operational execution. It is well-positioned for the growth in future demand for wind and solar energy globally. How has rising energy prices affected the trajectory towards net zero? In theory rising energy prices should have a positive impact on the trajectory towards net zero, with price increases decreasing demand for traditional energy and driving demand for cheaper low-carbon sources, further buoyed by governments supporting efforts to reduce energy demand. In practice it seems there has been more focus on supply and historically carbon-intense sources, most likely due to the influence of lobbyists. Energy issues arising from the Russia-Ukraine crisis may also have an effect, particularly if countries look to move away from energy sourced in particular regions. This will result in an increasing focus on renewables and demand side management. We have also seen green hydrogen emerge strongly. Phil Kent, director at GCP Infrastructure Investments How have the rising energy prices impacted your portfolio? Around 60% of GCP Infrastructure’ s portfolio is invested in renewable generation assets. Higher energy prices benefit these projects, as they are receiving higher levels of income associated with the higher electricity prices. As a result short-term forecasts of cash generation are higher. Over the medium and longer-term, we expect a structural shift away from Russian gas towards LNG and other energy sources to result in higher prices. We expect both these short and longer-term movements will be positive from a valuation perspective, and therefore the net asset value of the fund. Have you added to renewable energy positions? GCP Infrastructure has made a number of recent investments in renewable energy projects. The most recent investment was a c. £6m senior loan secured against three anaerobic digestion projects. GCP has also recently invested in a deep geothermal project at the Eden Project in Cornwall . Do you have a preference for renewable energy in your portfolio? Renewable energy makes up c. 60% of GCP Infrastructure’ s portfolio across a number of different asset classes: wind, solar, hydro, anaerobic digestion, biomass and geothermal. Recently, lower wind speeds meant the wind investments were generating at reduced capacity during periods of higher electricity prices, meaning the full benefit of higher prices was not being captured in revenues. In the diversified portfolio this was offset by other baseload technologies such as biomass and anaerobic digestion which performed well during these periods. What is your outlook for renewable stocks over the longer term? The performance of renewable stocks over time will be determined by what is assumed in current valuations, and the extent to which reality matches these forecasts. We see widely varying views in assumptions such as electricity prices, inflation , asset lives, operating cost efficiencies and tax. This ultimately goes to the risk embedded in a valuation and likelihood of under or over performance relative to this.

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