Responsible Investment

ESG Wrap September

By AMP Capital

This month the key ESG issues making headlines are

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Oil & Gas: Chevron’s Gorgon CCS project delayed

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Global E-Commerce Giants - workers face insecurity and crushing targets

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Automakers under suspicion of fresh cheating in new emissions test

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San Francisco climate change resolution ‘just the start of pressure’ on US insurers

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Energy: US Utility Rates Driving Record Demand for Home Energy Storage Systems

Oil & Gas – Chevron’s Gorgon CCS project delayed

  • Australia’s largest carbon capture and storage project, associated with Chevron’s Gorgon project, has been delayed by at least two years
  • The offsetting of the CO2 released, including the sequestration of the majority of the CO2, was a key reason the Gorgon project was approved
  • Chevron predicted that between 5.5 and 8 million tonnes of CO2 would have been injected into the ground during the plant's first two years of production from the Gorgon field, making it one of the largest carbon abatement activities in the world and a significant contributor to Australia meeting its Paris commitment
  • Chevron stated that the delay is due to water entering the pipeline and reinjection well, which increases corrosion.

So what?

  • The Gorgon CCS plant was seen as one of the starring CCS projects for this technology. The delay takes the shine off the technology and raises further doubts about the economic viability of CCS as a carbon abatement technology for use in other industries, such as fossil-fuel power generation.
  • Chevron could be ordered to pay around $40m/yr to offset the emissions if the facility cannot operate as proposed, according to a report by The Financial Times.
  • As an aside and rather ironically, with all the focus on CO2 reduction, the UK is currently facing a shortage of CO2 supplies used in food and drinks, most notably beer, so it must be serious. Approximately 45% of CO2 for these markets comes from the manufacture of ammonia, where CO2 is a by-product.

Source: The Chemical Engineer, July 2018

Global E-Commerce Giants - workers face insecurity and crushing targets

  • A few global e-commerce giants have recently opened up warehouses in Australian cities to more quickly service local customers. These fulfilment centres are where thousands of goods are stored, packed and then sent to shoppers by workers.
  • Many of the workers in these types of centres are employed on a casual basis by a third-party labour hire company, not directly by the e-commerce company.
  • Recent reports have revealed the poor conditions in some of these warehouses with every step workers taking during their shift being monitored and analysed.
  • Fairfax Media reported that some workers claimed that their shifts were cancelled at very short notice based on the number of orders received that day, leaving workers without their agreed hours. Workers also revealed that every step they were taking during their shift was being monitored and they were scared to take a break or go to the bathroom for fear of being fired.
  • Casual rates paid to these workers were below those of workers at a nearby facility owned by competitors and workers were not allowed to negotiate collective agreements.

So what?

  • Many of these global e-commerce giants achieve incredible rates of efficiency. Moreover, the use of innovative technology has given the power back to consumers around the globe, giving them access to an infinite number of goods at reasonable prices and delivered to their home incredibly quickly. Unfortunately, while consumers have gained, workers have suffered when it comes to the wages and working conditions they sign up to.
  • The relationship between workers’ bargaining power, casualisation and Australia’s persistent low wages growth is a hot topic in policy circles at present. Legislation is obviously needed to ensure these workers are protected. Yet, by themselves legal changes will not be enough.
  • It is likely that companies will continue to push the boundaries, especially if it affects their bottom line. As a result, investors will increasingly be called upon to hold companies to account.

Source: SMH, September 2018

Automakers under suspicion of fresh cheating in new emissions test

  • The European Commission has found evidence that automakers are cheating on a new emissions testing method. Unlike last time, they are over-polluting in an attempt to make it less challenging to achieve the stringent cap on CO2 emissions in the future.
  • Since 2017, these companies have had to test new models using the Worldwide Harmonized Light Vehicle Test Procedure (WLTP) method. A much more difficult test created following the diesel emissions scandal in 2015.
  • The results of the new test will be used in the calculation of the overall emissions benchmark for new car fleet in 2021. Manufacturers will have to meet these limits if they want to avoid large fines in the EU.

So what?

  • What we need here is increased transparency and CO2 limits established through officially monitored tests, rather than on the basis of manufacturers’ emission claims.
  • After the 2015 vehicle emissions scandal, one automaker recorded its first annual loss in more than 20 years, after more than doubling the amount set aside to pay for costs related to the scandal (€16.2bn).
  • Unfortunately, it is often shareholders who pick up the bill in situations like this, which even if paid, doesn’t guarantee the future integrity of the brand.
  • This company’s manipulation of its diesel vehicle emissions raised serious concerns over its business ethics and governance practices. Governance issues included executive misconduct, the Chairman being an executive, related party transactions, the absence of a pay committee, an excessively large board, a controlling shareholder and share classes with unequal voting rights. As we have stressed many times before, the quality of governance usually is a good indication of how well the company is managing other social and environmental risks.

Source: Handlesblatt July 2018

San Francisco climate change resolution ‘just the start of pressure’ on US insurers

  • The city of San Francisco has passed a resolution encouraging insurance companies to stop insuring and investing in fossil fuels.
  • This is not surprising given the insurance industry is on the frontline of climate change. Insurance companies have the most recent and in-depth data about climate disasters including hurricanes, floods, fires, droughts and storms and know that these events will only get worse. Several insurers have already taken action by increasing premiums or refusing to insure some customers in high-risk areas.
  • European insurers publicly cautioned about the dangers of climate change way back in the early 1970s. Since 2015, 17 large insurers have divested approximately $30 billion from fossil fuel companies and five have even stopped or are limiting their insurance of coal companies. Unlike their European competitors, the majority of US insurers have not publicised plans to decarbonise their portfolios.

So what?

  • It is likely that public pressure will continue to mount on insurance companies to divest or withdraw insurance for fossil fuel companies.
  • Climate disasters are becoming more severe and frequent and as a result people and institutions are looking to insurance companies to take a more definitive stance on the issue.
  • It’s a little confusing to think that insurers are investing in and underwriting the very industries which are causing accelerated climate change and increasing the insurance claims that they have to pay out. But we understand this takes time and managing the steady transition to a lower carbon economy is vital.
  • AMP Capital has been engaging with Australian insurers for many years. We recognised early on the need for structural change in the economy and to manage climate change risk would require coordinated action by government

Source: Insurance Business America, July 2018

Energy: US Utility Rates Driving Record Demand for Home Energy Storage Systems

  • Installations of home energy storage system, i.e. batteries, in the U.S. hit a record high in the first quarter of 2018. The new capacity of 36 MW-hrs will sustain an estimated 4,000 home systems and adds to the 1,080 MW-hrs installed in the past four years.
  • California and Hawaii, states with progressive policies for renewables, one third of all installations in the first quarter of 2018. (California’s self-generation incentive program, for example, offers energy storage subsidies if installed with a solar panel system.) Both states are looking to revise net-metering restrictions and Time of Use (TOU) rates, which would make home installations more appealing and affordable.

So what?

  • As solar has gained popularity over the past decade, and customers began generating their own energy during peak times (noon), peak-time electricity demand for utilities has dropped. As a result, the utility companies shifted the peak times and time-of-use (TOU) rates to later in the afternoon and early evening when solar wasn’t as effective. Utilities have also begun to limit net-metering compensation, which allows customers to offset public utility costs or sell surplus energy generated at home back to the public grid. This and the decrease in battery costs has driven the demand for home energy storage systems.
  • This article highlights why pumped hydro is seen as a potential solution to the “intermittent renewable energy problem”, with one project being able to supply nearly 300 times the energy that the entire residential energy storage built over the past four years. One of the advantages however of residential storage is that storage is embedded in the energy networks and near the demand, which can reduce transmission and network costs.
  • What's next: As home energy storage systems proliferate, adding an electric vehicle to the mix would provide a trifecta of home renewables. Using stored energy generated from rooftop solar panels to power an electric vehicle could provide a model of fossil fuel-free living.

Source: Axios, July 2018

  • ESG Wrap
  • Environmental Social Governance (ESG)
  • Opinion
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Important notes

While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.

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