Focus on sustainability a key consideration in mining investment.

Australia’s resources sector continues to be important for the Australian economy and the sharemarket but investors are approaching it differently as the community reacts to climate change and other environmental and social issues.

As the world transitions to a low-carbon economy, pressure is building on miners to lower their carbon dioxide and other greenhouse gas emissions. Big investors are using their might and warning they will turn away from companies that do not work to reduce emissions causing climate change.

BlackRock CEO Larry Fink recently made it very clear in his annual letter to CEOs that climate change is a key investment risk. He noted that awareness of climate change is rapidly changing and the world is about to experience a “fundamental reshaping of finance” and reallocation of capital away from carbon polluters.

“Climate change is almost invariably the top issue that clients around the world raise with BlackRock,” Fink said. “From Europe to Australia, South America to China and Florida to Oregon, investors are asking how they should modify their portfolios. Because capital markets pull future risk forward, we will see changes in capital allocation more quickly than we see changes to the climate itself. In the near future – and sooner than most anticipate – there will be a significant reallocation of capital.” 

BlackRock has recently joined Climate Action 100+, which represents 370 global investors with more than $US41 trillion ($59 trillion) under management. The group is an investor initiative formed to ensure the world’s largest corporate greenhouse gas emitters take necessary action on climate change. 

Locally, the Investor Group on Climate Change, for example, which includes the nation’s largest institutional investors such as superannuation funds AustralianSuper and Unisuper, is promoting action “to avoid dangerous global warming, responsibly manage long-term risks, and drive sustainable returns for investors and the beneficiaries they represent.”

This approach towards more sustainable investing includes taking environmental, social and governance (ESG) factors into account when making investment decisions. This approach is being applied by investors towards Australian miners and Australian companies generally as the demand for ESG investments rises.

The nation’s big miners have responded by lowering their carbon emissions and supporting the international Paris Agreement, which aims to keep the increase in global temperature below 2 degrees centigrade. Australia’s biggest miners, BHP Billiton, Rio Tinto and Fortescue Metals Group are all reducing their greenhouse gas emissions and sourcing more energy from renewable sources.  

BHP’s strategy includes investing in low emissions technologies. It recently announced it would meet energy requirements at its mines in Chile from 100 per cent renewable energy sources from the mid-2020s and is examining renewable energy options for its Pilbara iron ore mine and Olympic Dam in South Australia.

Rio Tinto is sourcing more energy from clean energy, with 71 per cent of its electricity now coming from renewable sources. With the sale of its remaining coal assets in 2018, Rio Tinto became the first major mining company to have a portfolio free of fossil-fuel production. 

Fortescue is using more renewable energy at its Pilbara mine after announcing last year that up to 100 per cent of daytime energy requirements at its Chichester Hub iron ore operations will be renewable energy from Alinta Energy. 

Renewables in focus

Across the board generally, miners are sourcing more of their energy from renewable sources.

As one of the world’s largest diversified resource companies and Australia’s biggest coal miner, Glencore has engaged with investor signatories of the Climate Action 100+ initiative to reduce its carbon emissions. The company supports the Paris Agreement and has prioritised its capital investment to grow production of commodities essential to the energy and mobility transition and to limit its coal production capacity broadly to current levels.

Although climate change represents significant risks for fossil-fuel miners, particularly coal miners, the global movement to reduce greenhouse gas emissions represents huge upside for renewable battery inputs such as lithium, graphite, cobalt and nickel. 

The big iron ore miners will survive because iron ore is essential for steel production, which all modern economies require, although these commodities must be mined while meeting the highest environmental standards.

According to government forecasts, Australia’s resource and energy export earnings are forecast to set a record $281 billion in 2019–20 as weaker prices are offset by higher volumes and a lower-than-expected Australian dollar. Commodities are largely denominated in US dollars.

Prices for iron ore are especially strong. It is Australia’s biggest export and we are by far the world’s biggest exporter by value. Iron ore producers are experiencing strong markets following supply disruptions after the Vale tailings dam collapse in Brazil. 

Rio Tinto’s share price is up 29.6 per cent over the year to 17 January, compared to 20.3 per cent for the S&P/ASX 200. Pure iron ore miner Fortescue Metals Group has surged 141.0 per cent and BHP Billiton has gained 21.5 per cent.

Australian gold prices have also surged, leading local miners to reopen previously closed mines.  This raises the prospect that Australia may become the world’s largest gold producer by the mid-2020s, according to the Office of the Chief Economist.

Sustainable options for investors

Some investors want to be part of the solution and ETFs can open opportunities to focus on investing in sustainable companies. 

The VanEck Vectors MSCI Australian Sustainable Equity ETF (GRNV) gives investors access to a diversified portfolio of sustainable Australian companies selected on the basis of in-depth analysis by world-leading research agency MSCI ESG Research.

Its portfolio includes Australian ESG mining leaders such as gold miners Newcrest Mining and Northern Star Resources, and Fortescue Metals Group.

GRNV tracks the MSCI Australia IMI Select SRI Screened Index (GRNV index). The index, among other screens, excludes investments in companies that have any ownership of fossil-fuel reserves, or derive revenue from the mining or sale of thermal coal, or from other activities related to oil and gas, such as transportation, distribution and refining. 

The result is an ETF that gives investors access to a low-carbon portfolio covering the universe of Australian equities, as the table below highlights when comparing GRNV’s carbon exposure to the benchmark S&P/ASX 200.
 

Note: ‘tCO2e/$m’ refers to tonnes of carbon emissions per $1m invested. 

Source: MSCI at 31 December 2019. These scores are updated each quarter and available on our website here.

Some investors may prefer to maintain a broader exposure to the resources sector as the companies themselves respond to environmental concerns. 

The VanEck Vectors Australian Resources ETF (ASX: MVR) invests in a diversified portfolio of ASX-listed securities with the aim of providing investment returns (before management costs) that closely track the returns of the MVIS Australia Resources Index. Its biggest holdings include miners meeting ESG standards, such as BHP Billiton, Rio Tinto and Fortescue.

MVR’s benefits include lower cost compared to equivalent actively managed funds, ease of trading and liquidity via ASX and diversification across the resources sector.  

Moreover, the ETF has outperformed the S&P/ASX 200 Resources Index, returning 28.9 per cent over the year to 31 December, compared to 26.3 per cent for the benchmark.

So, although climate risk is emerging as a key risk for investors, focusing on ESG factors in an investment selection is one of the key ways investors can insure against climate risk and ensure their investments are sustainable. 

Investors can do that through a sustainable equities fund or a broad-based equities fund that invests in companies that are now required to meet and report on ESG requirements as well as engage with lobby groups such as Climate Action 100+.