Responsible Investment

ESG Wrap February

By AMP Capital

Key points

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Landmark climate ruling as NSW court rejects coal mine

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Vale, another dam disaster!

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France to increase the price of food?

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Sleepwalking towards the insectopocalypse

Landmark climate ruling as NSW court rejects coal mine

  •  NSW's Land and Environment Court found the emissions of greenhouse gases and resulting climate change from Gloucester Resources Limited’s proposed coal mine were just some of the reasons to reject the project.
  • This was the first time an Australian court had heard evidence from experts about the grave need to remain within a global carbon budget against a background of a proposed new coal mine. Justice Preston also noted the "significant adverse social impacts on the community" from the possible mine.
  • The direct and indirect greenhouse gas emissions associated with the project would have contributed 37.8 million tonnes of carbon-dioxide equivalent.

So what?

  • The outcome of this case was being watched globally. Over the past few years, we have seen more stakeholders seeking climate change litigation, particularly in the US and Europe. Campaigners are frustrated about the slow pace of regulatory change in the area of climate change and are looking to the judicial system to cut greenhouse gas emissions.
  • This decision will be added to the list of global court cases which directly connect coal mines and the associated fossil fuels with climate change.
  • The sector of Australia’s economy that will probably be most affected by climate change policy is energy, which is the largest contributor of greenhouse gas emissions in most industrialised countries.
  • Business models along the energy supply chain, from electrical power generators to coal miners, oil companies, and liquified natural gas (LNG) suppliers, along with the ecosystem of support companies, will either be transformed, or will cease to exist. Earnings from their current operations are likely to prove unsustainable over the long-term, representing a major risk to investors.
  • This landmark decision sends a clear message to the fossil fuel industry that it cannot continue to expand if we are serious about tackling climate change and will add further momentum to the shift to clean, reliable renewable energy systems.
  • It is likely that any future coal mines will face a similarly long, tedious and potentially unsuccessful process to gain approval.
  •  At AMP Capital we actively seek to invest in assets that are aligned to our views on climate change. One initiative is the work we do to measure and report the carbon footprint of many of our funds.

Vale, another dam disaster!

  • On January 25th a tailings dam at Vale’s Córrego do Feijão mining complex in south-eastern Brazil burst, covering people and buildings in neighbouring Brumadinho with mud. So far the number of confirmed fatalities has exceeded 160, with many more remaining unaccounted for.
  • Media reports state that five people have been arrested, including two German safety-assessors and eight Vale staff. US investors have also filed a class action against Vale and its executives for failing to disclose environmental risks.
  • In 2015 Brazil’s Vale, the world's largest iron-ore producer, suffered a catastrophic failure at a tailings dam owned by Samarco killing 19 people. Three years later Samarco remains closed awaiting the necessary licences it requires to resume operations. On top of the US$1.2 billion Samarco has already paid in repairs and compensation, there are reports of a US$1bn settlement with the Brazilian Government.
  • The failure of dam walls can be attributed to extreme weather events but are more likely to be the result of poor design and/or poor maintenance.
  • A chronicle of major tailings dam failings shows the regularity at which disasters have occurred. Reports state that of the roughly 3,500 tailings dams worldwide, over 300 collapse each year, with two to five being “major” failures like Vale’s. After recognising this, the United Nations Environmental Program recently issued recommendations for enhancing tailings dam safety.

So what?

  • The impact of tailings dam collapses includes the tragic loss of life, loss of vital infrastructure (transport, residential and mining) and environmental damage (highly-toxic mining-waste). In addition to these social and environmental costs, such disasters also have significant financial and corporate governance ramifications for the companies involved. These can include financial liabilities related to the event, higher future capex costs as safety standards are tightened, reputational risk and changes to the company’s governance and management structures.
  • Following both the Samarco and Brumadinho disasters, the short-term iron-ore price rose in anticipation of shortages from supply disruption. However, over the medium to long-term, mining companies’ cost of doing business may rise substantially – impacted by fines, remediation costs, higher insurance premiums, increased maintenance spend, etc. Such costs are not only limited to companies where the disaster occurred but may also impact the broader mining sector through increased ESG scrutiny, costs and regulation. In ESG terms, the most important lesson companies must learn is that safety is not negotiable.

France to increase the price of food?

  • A new law has been passed in France so that no food may be sold with a margin of less than 10%. The aim is for French farmers and small-scale food producers to receive more income.
  • The law was introduced to stop “loss-leading” type practices such as those seen in Australia with the $1 milk wars. These practices lure customers into the store by selling certain products at, or sometimes below, cost. The customer then invariably purchases other products at much higher margins.
  • In the Australian milk wars case, dairy farmers appeared to wear the costs of such an approach yet received no benefits.

So what?

  • Consumers are increasingly aware of how loss-leading practices can impact on the supermarket supply chain with the savings pocketed increasingly being outweighed by anger at the apparent undercutting of the livelihoods of primary producers. To that end, such a law would appear to be attractive.
  • However, poorly formed laws to address such a problem can have unintended consequences, including raising the price of staple food items (which disadvantages poorer sections of the community in particular), supermarkets pocketing the extra revenue without passing it onto primary producers, supermarkets flouting the law by offering rebates via rewards schemes, etc.
  • Another unintended consequence would be that big supermarkets choose to push their own home brands at a lower price which would negatively affect small to medium businesses trying to sell their branded milk.
  • It is important for lawmakers and retailers to very carefully balance the competing interests of consumer affordability and production sustainability.

Sleepwalking towards the insectopocalypse

  • A review published in the Biological Conservation journal in April 2019 highlighted that at current rates of decline, around 40% of insect species face extinction within the next few decades. They attribute this to four factors:
        > habitat loss via conversion to intensive agriculture or urbanisation;
        > pollution from pesticides and fertilisers;
        > pathogens and invasive species; and
        > climate change.
  • The report identifies dung beetles, moths and butterflies as particularly vulnerable. Dung beetles are especially valuable as they contribute to healthy soils and mitigate the infection of livestock. Furthermore, the decline in global population of bees has already been well documented and previously discussed in our ESG Wrap.
  • The report recommends that current agricultural practices need to be rethought, especially through cuts in pesticide usage and the use of more sustainable, eco-friendly alternatives, as well as the cleaning up of polluted water in agricultural and urban areas.

So what?

  • The implications of this are far-reaching. Insects form a crucial cog in the planet’s ecosystem. Firstly, insects are a key link in the food chain – impacting the birds and mammals feeding upon them. Secondly, they help to maintain healthy soils for agriculture. Thirdly, many are responsible for pollinating crops. The authors describe the implications of such population loss rates as “catastrophic”.
  • Companies in the agricultural sector and/ or those involved in the food production chain will be increasingly exposed to supply chain risks in this regard. Those with more efficient and eco-friendly agricultural practices – particularly with respect to their pesticide and fertiliser usage, such as those involved in the production and distribution of organic products – will be more sustainably positioned for the long term, as well as being less at risk of potential legislative or regulatory actions.
  • Environmental Social Governance (ESG)
  • Opinion
  • Responsible Investment
  • Sustainable Investment Insights

Important notes

This article has been prepared to provide general information and does not constitute 'financial advice' for the purposes of the Financial Advisors Act 2008 (Act). An individual investor should, before making any investment decisions, consider the information available in the relevant Product Disclosure Statement and seek professional advice. While every care has been taken in the preparation of this document, AMP Capital Investors (New Zealand) Limited and the AMP Group (together, 'AMP') make no guarantee that the information supplied is accurate, complete or timely and do not make any warranties or representations in respect of results gained from its use. The information is not intended to infer that current or past returns are indicative of future returns. The views expressed are those of the author and do not necessarily reflect those of AMP. These views are subject to change depending on market conditions and other factors.

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